When it comes to apportioning funds for your retirement and for your legacy, it may seem like a trade-off between a more comfortable retirement, or a more robust legacy. Not necessarily so. You can have your proverbial cake and eat it too by using retirement income products and life insurance. These financial solutions are designed to provide for both your retirement and legacy needs simultaneously. Life insurance offers guaranteed lump sum payouts that can be used to generate more wealth for your retirement, and augment the assets you can distribute.
Just like how exercising to keep fit improves your body’s strength and flexibility, life insurance can enhance your retirement as well as legacy planning.
Competing needs of retirement and legacy planning
While each family faces different circumstances, a common issue often recurs: When wealth is passed through the generations, there is usually less wealth left for the next generation. While it may be tempting to quickly resolve this by deciding to retire on less and pass on more, there are ways to address these competing needs. One key strategy is to harness various types of life insurance.
Augmenting the legacy to be passed on
For instance, Mr. Agus has IDR100 billion of assets and plans to use half for his retirement, leaving the remaining half for his legacy. If his child did the same, his grandchild would be left with IDR10.25 billion after two rounds of generational wealth transfers.
A solution to maintaining generational wealth could involve purchasing a single-premium life insurance policy. By paying a IDR25 billion premium for a life insurance policy with a IDR100 billion payout, for example, Mr. Agus would have more for his retirement, while leaving a larger legacy for his descendents. Following this strategy through each generation keeps the family wealth from dwindling.
Having more for retirement and wealth transfers
Another solution is to bundle legacy planning with retirement income products. With this strategy, your retirement needs are sorted by monthly retirement income policy payouts, and your legacy is preserved by a universal life policy.
Take Mr. Harto for example, who has IDR100 billion of cash and investments. Before adopting this strategy, he would have IDR50 billion to retire on, leaving IDR50 billion for his son Mr. Arif. By bundling legacy planning and income stream products, Mr. Harto is able to increase his retirement fund to IDR75 billion (retirement fund + potential income from retirement policy), and transfer IDR121 billion of wealth to Mr. Arif (death benefit from retirement income policy + death benefit from universal life policy).
Life insurance also helps when assets cannot be distributed equally
Another common issue arises from the illiquid nature of assets that many high net worth individuals face, despite their wealth. For instance, assets such as real estate, antiques, and heirloom jewellery cannot be split easily.
Instead of being forced to sell these illiquid assets to distribute them fairly, life insurance payouts can enable you to distribute one asset to a beneficiary and an asset of equal value to another.
Types of life insurance used for legacy planning
Term insurance
Term insurance covers the insured person for a fixed period, such as 10 years, 22 years, or until they reach a specified age. The policy pays out the sum assured as a lump sum to beneficiaries in the event the insured passes away during the policy term.
As term insurance is a pure protection product without any savings element, it is the most affordable tool to provide insurance coverage.
Whole life insurance
Whole life insurance provides the policy holder with life-long protection. Besides protection coverage, part of the premiums is invested in a participating fund managed by the insurance company.
Getting started on your legacy plan
It is a good idea to start planning early. Decide what you want to set aside for your own retirement and your legacy planning will take shape simultaneously. Financial solutions like life insurance and retirement income policies can enhance both your legacy and your retirement provisions, so that you can sit back and retire comfortably.
