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Three strikes and you’re out…

Money begets money; wealth begets wealth – at least for those ultra-high net worth individuals who themselves created the wealth.

Once they depart us however, and shake that mortal coil, the bet is off.

Without a well-thought-through wealth preservation plan, their children are at slightly over even money. The third generation has long odds. It’s trite, but it is a conventional wisdom for a very good reason – because it is generally so.

The creation of extra liquidity as part of generational transfer shifts the focus to teaching the next generation how to utilise and create wealth. This is away from simply how and when to pass wealth on to them. Universal life insurance does not simply pass wealth on. Rather it teaches the use of wealth to create further wealth.

The capacity to create – and not simply enjoy

Successful persons who have created vast wealth do not only wish for their heirs to partake in this wealth. They wish for their heirs to learn and to enjoy the satisfaction in having created wealth. Here lies an enormous difference.

It is this ability to understand markets, an industry, personalities, leadership, or whatever combination of those many factors that dictate success and failure, that self-made wealthy persons wish to pass to their heirs. It isn’t the wealth itself – that is the measure of success and the icing on the cake. Yes, they wish to pass on the fruits of their success materially. More than this though, is the feeling of accomplishment, and the wealth here as an added means to accomplish.

The heirs themselves want the same.

Bricks, mortar and insurance

Family wealth that persists over generations is characterised by permanence, by having structures and impediments to prevent it being frittered away.

In a society premised upon landed gentry and property rights, wealth persists over generations. This is easy enough to understand in terms of manors and Earls and Dukes. It is though also true for more esoteric property, such as patents, copyrights, trusts and corporations. These are all ultimately impediments to wealth being squandered. This though also creates a problem, for when wealth is made “permanent”, then the ability for the subsequent generations to remain true to the initial values that created that wealth is partially removed. It becomes all too easy to suckle at the teat and not to live productively.

Insurance – as a concept – is the foregoing of a small piece of present liquidity, to provide for liquidity in a time of future need. This is very simple and is understood by all.

What then of the UHNW person, and this essential question of securing their heirs? Universal life insurance creates extra liquidity to allow the next generation to seek their own path yet take with them responsibility and the risk of failure. It permits errors, and thus permits a learning process.

This is far more defining than an ordinary income-earner purchasing life insurance for the spouse and children from the monthly paycheck. For the UHNW individual, the stakes are far higher. It is about success and self-definition.

Talk is cheap

In all my years dealing with UNHW individuals, I am consistently astounded by the mismatch between intention and action. I can hardly think of a person who was blasé about the lives of their children; it is universal to want our children to succeed.

This is not measurable purely in terms of wealth, but rather to fulfillment through attaining (and not obtaining) wealth. Many UHNW persons will go as far as setting up a structure to pass on their wealth – but they forget to plan for the passage of the means to enjoy it.

This is the role that Universal Life Insurance plays. It creates liquidity that enables the next generation to have vision, expand, and to seek other endeavours.

HNW life insurance: “Universal Life” and the world of jumbo insurance

Universal Life Insurance grants insurance at extremely high levels (anything from $3m upwards, with $100m+ becoming normal), through a hybrid investment vehicle. An attractive fixed-income linked return is paid on a policy that is characterised by extreme flexibility and which can be cancelled at any time. It effectively replaces a conservative portion of a person’s investment portfolio.

Roots and wings

A child who inherits a family business is compelled to maintain it or to grow it. To maintain it only limits the child’s horizons for him or herself succeeding. To grow it risks losing it. Liquidity hedges this risk.

A child (perhaps the brother or the sister) may not want to take over the family business. Perhaps they have aptitude elsewhere, or perhaps they are simply too young, and need a decade of maturity. Maybe they will make an unfortunate decision personally, and marry in error.

Universal Life Insurance can “pay out” the child who is otherwise inclined, without compelling him/her onto the business (and the business onto him/her). It can allow a different share class, to allow participation but not management until maturity comes.

Goethe famously proclaimed that children require both “roots and wings” from their parents. Universal Life Insurance enables the wings to spread. It frees capital; it diversifies life choice; it permits mistakes, risk and daring. It creates venture.

Universal Life Insurance is ultimately a tool that assists successful generational change. It is by no means a solution in and of itself, but it does however provide scope, and secures the basis.

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