Quora Answer: Is Life Insurance a Business Expense?

The following is my answer to a Quora question: “Is life insurance a business expense?” 

Life insurance policy premiums may be considered a business expense if it is a means to mitigate against loss of personnel, as part of business succession planning, and as a keyman insurance.  For whole life and term plans, this may be tax deductible.  For group health, it may or may not, depending on the nature of coverage.  It would be difficult to justify it for an investment-linked or endowment plan, and the realised gains from such a policy would be taxed as an income.

Quora Answer: How Much Life Insurance Does Someone Need?

The following is my answer to a Quora question: “How much life insurance does someone need?” 

You need as much life insurance as you deem your life, your family, and your assets worthy of coverage.  The question that needs to be asked for life insurance is in the event of death, disability, or critical illness, how much does your family deserve of your income to be replaced?  How much do you feel you deserve to maintain a modicum of similar standards of living?  In the case of death, you are not buying because you will die; you are buying insurance because the people that matter to you will live on after your demise, the causes you support, the things you believe in.  That is what the money is for.  It is about legacy. 

In the same vein, when it comes to general insurance, you are considering if anything were to happen to your assets, how much do you need to cover.  When you consider how much you are prepared to lose, to loss, to theft, to damage, to tragedy and disaster, you are most likely going to take the most coverage you can afford.  When people look at premiums first, they are either the most optimistic people in the world, or they have not considered what they stand to lose.

Quora Answer: Is Keyman Insurance Tax Deductible?

The following is my answer to a Quora question: “Is keyman insurance tax deductible?” 

In Singapore, there are some considerations to be addressed before it can be.  The premiums incurred on a keyman insurance policy is deductible, but only if all the following conditions are met.  Firstly, the purpose of the policy is to insure the business against loss of profits arising from the death or disability of the keyman.  Secondly, the capital sum insured is directly related to the extent of the annual profits directly attributable to the services of the keyman.  This means that the payout is tied to the impact of the keyman’s verifiable contribution on revenue.  Thirdly, the insurance policy remains the property of the business, and there be no assignment of the benefits under the policy to the insured or his family.  Should the business intent to pay out to the family of the keyman or the keyman, it must be a distinct transaction from the insurance payout itself, and cannot be through some form of assignment of proceeds.  Aside from all this, the insurance policy does not provide for a cash surrender or investment value.  This precludes whole life and investment-linked plans.  It has to be a term policy.  Also, the loss of the keyman should not affect the entire profit making structure of the business. 

Singapore’s Income Tax Act 1947, Section 14, allows deduction for expenses that are wholly and exclusively incurred in the production of income only.  Section 15, of the same act, further provides, among other things, that capital expenditure is not deductible.  Generally, businesses can claim deductions on premiums incurred on any insurance policy where an employee or a nominee of the employee is the beneficiary of the policy.  This is considered a provision of employment benefits, which constitutes part of staff costs.  Conversely, if the beneficiary of the policy is the business itself, premiums incurred are not deductible because the expense is not incurred in the production of income, but to acquire a capital asset, which in this case, is the insurance policy. 

There is an exception to the principle stated above, though.  Premiums incurred on a keyman insurance policy is deductible for income tax purposes although the beneficiary of the policy is the business if the purpose of the policy is to insure the business against loss of profits arising from the death or disability of a keyman.  The principle is that the keyman has the prime responsibility for the profitability of the business.  Hence, premiums paid, in providing protection against loss of profits from the death or disability of the keyman are wholly and exclusively incurred in producing the income of the business or trade. 

Also, the capital sum insured is directly related to the extent of the annual profits directly attributable to the services of the keyman.  For this to be accepted by IRAS, the responsibilities of the keyman in the operations of the business must be prime, shared, or contributory.  Generally, sum assured is limited by the amount of profits directly attributable to the keyman in his capacity of having the prime responsibility for the profitability of the business.  In cases where the capital sum assured exceeds the annual profits of the business, the premiums will not be deductible as they are considered as not wholly and exclusively incurred in the production of income.  This makes sense since it precludes using excessive coverage as a means to reduce tax exposure. 

The insurance policy remains the property of the business, and there must not be an assignment of the benefits under the policy to the insured or his family.  The tax deductions on premiums may be denied if benefits of the policy accrues to the keyman in his personal capacity.  This is because the premiums paid are not wholly and exclusively incurred in the production of income.  Examples that would preclude this would be in a case where the business is a proprietorship.  Sole proprietorships and partnerships are not distinct legal entities.  The assets and liabilities of the business are the assets and liabilities of the proprietor, and that applies to any insurance policy.  Another example would be in the case where the business is a distinct legal entity by the substantially owned by the keyman or his family, which constitutes an unacceptable conflict of interest from a tax perspective.  On the latter case, however, it is possible to appeal to IRAS and have it accepted.  Whether the benefits of the insurance policy has accrued to the keyman in a personal capacity is determined based on the facts of each case. 

As mentioned above, the insurance policy must not provide a cash surrender or investment value.  Any policy providing a cash surrender value or an investment value, the premiums would not be considered as incurred wholly and exclusively to protect against the loss of profits.  This is because the investment payout under the policy, whether a withdrawal of proceeds, or a coupon of any sort, will be made to the business even if there is no claim on the policy.  Therefore, the premiums of such policies do not qualify for tax deduction.  In addition to whole life, and investment-linked plans, this also includes endowment plans, retirement policies and group personal insurance. 

Deduction of premiums on keyman policies do not apply to any case where the loss of the keyman affects the entire profit-making structure of the business, to the extent that the business can no longer carry on as a going concern.  This is because in such a scenario, premiums are clearly in respect of the capital structure of the business, not just for the loss of profits.  An example of this would be a case where a sole-proprietor is denied tax deductions if the keyman insurance is taken up on his own life.  The sole-proprietorship business is not a distinct legal entity, and the death or disability of the key man will affect the entire profit making structure of the business.  However, it is possible to secure tax deductions if the keyman insurance is taken up on an employee provided that all other conditions are met. 

In the event of a payout of any such policy where the premiums are tax deductible, that payout constitutes a trading receipt and is taxable.

Quora Answer: Why Would an Insurer Cancel a Policy?

The following is my answer to a Quora question: “Why would an insurance company cancel a policy?” 

Policies lapse when premiums are not paid.  Coverage ends when the period of coverage is over.  For a policy to be cancelled, however, normally means that the insurer discovers a material fact that would have affected underwriting when the application for coverage was made.  If the omission was due to a mistake, the policy is simply cancelled, and new coverage must be applied for.  If the omission was deliberate, there are likely to be legal consequences.  Examples of omission of material facts include falsified data, non-declaration of medical conditions, and discrepancies in the contract. 

Another reason why a policy may be cancelled, especially for investment plans, is when the company considers the transaction suspicious.  This includes a pattern of churning, constant top-up and partial withdrawals without a sound financial reason, or a beneficial ownership arrangement that is suspicious.  This pertains to money laundering, and the insurer is obliged to make a report to the authorities.

Quora Answer: What Insurance is Good for a Wealthy Person?

The following is my answer to a Quora question: “What insurance is good for a wealthy person?” 

Insurance is a means to mitigate loss by engaging a third party to guarantee an amount to compensate in the event of specified loss.  Logically, it then follows that the more assets someone has, the more expensive those assets, the greater the need for compensation in the event of loss.  The wealthier someone is, it logically follows that the more insurance they need. 

They need to be compensated in the event that they are unable to earn an income due to death, disability or illness, of in the event that they are precluded from partaking in their profession.  If they own a business or any revenue-generating entity, they require compensation in the event of loss due to force majeure, litigation, accident, fraud, and dozens of other things.  For a wealthy person, all insurance is good for them, and the more they can get, the better.

Quora Answer: Can Startup Funding be Insured?

The following is my answer to a Quora question: “Can startup funding be insured?” 

The funds themselves cannot be insured.  The company is insurable, but the coverage cannot be based only on the cash, since underwriting will typically take liquid cash at around 10% its value.  The company exposure can be insured such as liability insurance of various types.  All these are forms of general insurance.  The company directors, and key personnel may be insured.  These may be general and life insurance.  Company staff may be insured.  This includes health insurance for all.

Quora Answer: How Do I Ensure I Never Go Bankrupt after Being Wealthy?

The following is my answer to a Quora question: “How do I ensure I never go bankrupt after being wealthy?” 

To be bankrupt is the state of being insolvent when debts are in excess of revenue, with no hope of actually paying, or a claim to that effect.  Being bankrupt is not the same as being poor.  It is a legal status where the bankrupt is barred from certain activities, has limited access to financial services, and constraints on legal ownership.  In return, they get legal protection from creditors.  Some bankrupts live quite well. 

There are several ways to ensure that you do not become personally bankrupt.  They range from good financial practices, to risk mitigation, to creating legal vehicles to shield yourself in the course of doing business.  The first involves good financial practices.  One of the rules is to limit personal debt, and spend within your means.  It seems like the most obvious thing, but too many people take risks in their personal finance on the assumption of a best case scenario for everything.  Any promised form of income and revenue that is not in your bank account is not yours, and there is some exposure.  This means do not borrow against future personal income, or some anticipated bonus.  The easiest way people fall into this trap is with credit card debt. 

Another part of good financial practice is to treat investment as a science, not a lottery.  This means no playing the market on the basis of rumours and assumptions, staying away from any business that offers gain well in excess of the amount invested, and studying risk exposure.  Risk exposure includes the standing of the businesses you invest in, such as their compliance and practices.  This includes the currency exposure if you invest in other countries.  This means political risk if you have investments and business in places that are less developed. 

The second part of protection is risk mitigation.  This includes practices to limit some of the risk, as mentioned in passing above.  Most of all, however, this is about having insurance.  Well managed insurance coverage ensures that untoward events such as accident, natural disaster, employee misbehaviour, and personal critical illness does not immediately impact the cashflow of the business or its revenue stream without some form of cushion.  A well-managed personal insurance portfolio is the surest protection against personal bankruptcy due to unforeseen events. 

Thirdly, if you are engaged in business or investment , you always run them through distinct legal vehicles, such as companies and trusts.  This means you load the risks and loans on these entities, and not yourself personally.  This ensures that should there be a catastrophic loss, such that debts exceed the value of collateral, it is a matter of declaring the entity bankrupt, while sandboxing your loss.  This is not as easy as it sounds because some forms of credit make directors and trustees personally liable.  You need to have a compliance and legal team to run this through. 

Finally, if you are wealthy enough to need these measures and vehicles, you are also wealthy enough to have financial consultants, accountants, lawyers, tax consultants, and relationship managers.  You should have them, and use them.

Quora Answer: Why Do the Wealthy Buy so Much Insurance instead of Self-Insuring through Savings?

The following is my answer to a Quora question: “Why do the wealthy buy so much insurance instead of self-insuring through savings?” 

A wealthy person would never think to ask such a question, because it demonstrates a fundamental misunderstanding of wealth and leverage.  The purpose of insurance is to manage risk, and mitigate exposure to risk.  If you are using your own funds, you are not managing that risk at all. 

For example, insurance is a means to mitigate the risk of loss of income.  That loss could be due to critical illness, disability, death of an income generator, or loss of ability to generate income through changes in the economy, or loss in business.  You cannot self-insure for that by simply saving, since you have not addressed the loss of the source of income, which generates those savings. 

For example, insurance is a means to generate and protect wealth in the event of loss of investments through various business, personal, legal or other factors.  If you have your savings garnished by creditors due to an adverse court judgement, that savings is not going to “insure” you.  If you have a divorce, and half your assets is taken away as part of the settlement, that means you have half those savings. 

These are just two examples.  Wealthy people, and people who aspire to wealth, buy a lot of insurance.  The more you have, the more you have to lose.  People also buy insurance with a death benefit, not because they are going to die, but because their family is going to live on after them, and they need to be protected from loss of income, and inherited debt.  There is no such thing as self-insuring through savings.

Quora Answer: Does a Good Financial Plan include an Insurance Plan?

The following is my answer to a Quora question: “Does a good financial plan include an insurance plan?” 

The purpose of insurance is to manage risk, and mitigate your exposure to risk.  That is an integral part of financial planning.  No financial plan is complete without planning for loss, for untoward events, or anything that would impact our income, and standard of living.  That is the purpose of insurance.  The more you have, the more you need to protect.  Conversely, the greater your wealth, the greater your need for insurance.

Quora Answer: What are the Reasons People Do Not Take Out Insurance?

The following is my answer to a Quora question: “What are the reasons people do not take out insurance?” 

Insurance is part of risk management.  It has a role in estate planning, in risk mitigation for specific activities, and in covering unplanned expenses.  People who do not take up insurance do so for three main reasons. 

The first is that they do not understand the role of the different types of insurance coverage, and minimise its importance.  They do not prioritise it, since it is viewed as an expenditure.  If they do take it up, it is the first item to be dropped in the event of a cashflow challenge. 

The second is that they are sceptical about the role of insurance, or shun it for ideological or religious reasons.  Perhaps they believe that it is against religion, such as some Muslims with their quaint notions of what is shari’ah compliant.  Perhaps they had a bad claim experience, and imagine that this is all a scam. 

The third is because insurance is not a viable option for them.  This could be denial of hospitalisation coverage due to pre-existing condition, or denial of general insurance coverage due to a poor claim history, or they could be somewhere insurance is not well regulated, and the industry has a poor reputation.  This is most likely in developing nations, fraud by insurers or their representatives is not uncommon.

Quora Answer: How Often Should I Review My Insurance Policy?

The following is my answer to a Quora question: “How often should I review my insurance policy?” 

At the very least, you should have your policy portfolio reviewed once a year.  This typically includes a financial health review, your coverage, and a consideration of developments in the next few months that would affect your coverage. 

However, a review would be necessary before these annual reviews if there have been significant events which would affect your coverage.  An example of such events would be the change of marital status, an addition to the family, change of occupation type, and major claims or death in the immediate family.  In effect, any event which affects the amount and availability of coverage to a significant degree would require a review.

Risk Mitigation in Wealth Management

Wealth management strategies are incomplete without risk management.  This is why insurance is an integral part of it, and its importance increases the more assets there are.  The more someone has, the more they have to lose.  Risk management is either overlooked, or outright disregarded, by many except the absolute wealthiest.  When risk is nit managed, a variety of events can derail any wealth management strategy, from illness, to estate disputes, to litigation.  Unless we are considering the mot unlikeliest of scenarios – an alien invasion, for example – or a risk that is beyond out ability to manage  -a meteor dropping into the ocean precipitating an extinction level event – all risk can be managed, and their effects mitigated. 

We need a paradigm shift, and understand that proper risk management ensures that loss of property, life, health, or income, is not debilitating.  We buy insurance not because we will die, but because the people we love are going to live.  A proper risk management strategy means that our interests can recover from loss.  Risk management, for the average person, covers several areas. 

The foundation of any insurance portfolio is life insurance itself.  Life insurance is not just insurance against loss of life, but also loss of quality of life and earning capacity, anything leading to a diminished standard of living.  This includes disability and critical illness.  Death itself is an event, and the survivors deal with that one time loss.  Disability and critical illness, on the other hand, are a lot more expensive.  They are not just a cost, but could result in the loss of more than one source of income for the family, since someone would have to take care of you.  That loss of income in totality is what needs to be covered. 

In addition to loss of direct income, life insurance is required to cover the costs of income replacement, from outstanding debt, to settlement of estate and probate, to fees arising from any of these.  Depending on where in the world the beneficiaries are, relative to the assets, and the policy, there is the consideration of income tax and estate tax.  In Singapore, like many other places, there is no income tax on the proceeds of an insurance settlement.  These funds are treated as an unexpected gain.  Singapore is also one of the few places in the world which does not have an estate or inheritance tax. 

The gains of the policy can be structured as a one off payment direct to the individual, or through an irrevocable trust.  If the payout is very large, the latter may be more suitable, since it can be stretched over a period of time, or more than one generation.  This provides enhanced value to the payout, since it mitigates the risk that the beneficiaries would waste that money on immediate gain, and impoverish themselves, negating the reason for having a policy.  We must account for the possible lack of financial education in our beneficiaries. 

The same considerations apply to disability.  Just like critical illness, total and permanent disability affects the entire family unit, and leads to the loss of more than one income.  There is also the cost of renovating the home for access, as well as the cost for professional caregivers.  An accident plan mitigates some of the cost of disability due to accidents, but it is not enough.  When calculating disability, just like critical illness, we must factor the loss of one or more income streams over an extended period, perhaps twenty or thirty years. 

The other leg of a proper insurance portfolio is a good hospitalisation plan.  Hospitalisation plans are not just about settling hospital bills, but mitigating the cost of medical inflation.  They are a means to ensure the cost and availability of long-term care is reasonable.  In Singapore, the average life expectancy is well into the age of 85 and above.  With the best in modern medicine available in Singapore, it means that the average Singaporean will likely live to suffer some form of critical illness, requiring long-term care.  This also means they have a real chance of outliving their retirement funds and assets.  Since a significant portion of that premium is paid by Medisave, it makes sense that a Shield plan is a must. 

From life insurance, we need to consider the various forms of general insurance.  The first of these is homeowner’s insurance and property insurance.  Property insurance covers loss or damage of the property itself.  Homeowner’s insurance covers loss of items such as clothing, personal belongings, and expensive furniture within the property itself.  There is no point in insurance to replace the house after fire, if there is no money to furnish it, for example.  Finally, we need to consider other forms of liability, such as being a business owner, personal liability to litigation, and any other form of umbrella coverage that may be required. 

A policy portfolio needs to be reviewed annually, and updated regularly.  In specific cases, it needs to be nominated, or assigned to various trusts or companies, as needed.  When we consider coverage, we need to look at what we are prepared to lose in any untoward event, put a monetary cost to that loss, and consider what can be covered, at a reasonable budget.  A good insurance portfolio is a requirement for any prudent individual who is working at acquiring wealth, and intend to leave a legacy after his passing.

Covid19 Claims Explode

Insurers in the UK were never prepared for claims arising from an entire nation’s economy being shut down for several months at a time.  This is a scenario that is being played out in many other nations.  Once they pay out those claims, we might see insolvency from smaller insurers, rising costs for reinsurance, and increased premiums for future coverage.  In the UK, insurers did themselves no favour by refusing payouts, and were taken to court.  Not only have they lost those court cases, but they will likely face resistance to increase in premiums.  This was handled badly, and is a lesson on how not to do it.

High Net Worth Individuals Emphasise the Importance of Insurance

On the 24^th June 2020, AIA Singapore, in conjunction with Ernst & Young, released a report on the insights into High-Net-Worth Individuals (HNWIs), specific to their views and adoption of insurance solutions for wealth management.  The intent was to identify specific challenges that HNWIs faced, and proposed insurance solutions to address these challenges. 

Firstly, it must be said that wealth management is a process that encompasses many areas of asset management besides investment, from risk mitigation, to legacy planning.  This encompasses many areas of a person’s life, including his family.  Wealth management is as much sustainable living as it is growth across generations. 

Increasingly, instead of getting the advice of multiple disparate entities and persons across disciplines, HNWIs have increasingly realised that they are better served choosing one financial consultant team, which includes people versed in areas from tax mitigation, to insurance, to investment.  This is more efficient, and allows these individuals to plan discreetly for the long term.  The modern consultancy team, such as Equinox GEMTZ, handles many aspects of the client’s portfolio and assets.  They include the following: 

Wealth Protection

Wealth protection is about identifying risks, from political exposure, to legal claims, to critical illness, to loss of life and the consequences of these.  Wealth protection is about ensuring risks do not lead to the loss of wealth, or at the very least, mitigate it.  This includes both life insurance and general insurance.  This includes structuring an entire insurance portfolio, and creating legal contracts to assign beneficiaries, to assign portfolios to distinct legal entities, to creating lasting powers of attorney, to even advising on the will and trust structure. 

Part of wealth protection is to create firewalls to sandbox specific threats to the client and his assets.  This also includes legal avenues of tax mitigation, addressing specific threats in areas that may involve security consultancy, and maintaining a business intelligence network.  Much of wealth protection is understanding where the threat is coming from.  Wealthy individuals have powerful friends, but also powerful enemies. 

It is obvious that such clients require comprehensive insurance coverage for death, disability, critical illness, accidents, and many forms of exposure.  These normally require high net worth policies, sometimes tailored, and corporate solutions plans for key personnel.  There are even insurance policies used to create a golden handcuff to secure talent for the long term. 

Liquidity Management

Liquidity management is about ensuring that business entities and the entire network, both the client as an individual, and major business interests, remain solvent in the event of untoward developments.  This also means putting in place policies that cover loss of income, and able to cover debt that the estate or any entities may incur.  The insurance policies are meant to address long-term debt. 

Retirement Planning

Most individuals eventually hope to transition from work to retirement, or at the very least, hand over aspects of the business to an heir or heirs.  This requires planning for specific income goals to maintain a standard of living, and mitigating the financial risks of getting older. 

Legacy Planning

Finally, people ultimately want to be remembered for something that matters.  This may involve creating a vehicle, such as a testamentary trust to distribute the estate over a period of time, or even across generations.  This also involves considerations of tax exposure, political exposure, and beneficial relationships.  This is estate planning on a larger scale.  There are HNWIs who want to establish endowments for education, the arts, or some form of charity. 

In consideration of the report, we note several things.

1. 90% of HNWIs in Singapore leverage on insurance for wealth and legacy planning.

2. 70% of HNWIs in Singapore have insurance that comprises more than 10% of their wealth and legacy planning.

3. 86% of HNWIs in Singapore own medical or critical illness insurance plans.

4. 96% of HNWIs in Singapore believe that retirement planning is an important part of their wealth management.

5. 48% of HNW entrepreneurs in Singapore have business wealth protection via a range of insurance products. 

The wealthier the individual, the more aware they are that insurance is an important component of risk mitigation, retirement planning, and legacy planning.  These numbers are well in excess of average people.  With the increasing number of family offices and funds setting up in Singapore, this area of the finance industry is expected to grow exponentially in coming years.