Succession: Financial Education More Important Than Ever for High Net Worth Individuals

A high fortune is not synonymous of a better financial education. The lack of adequate financial knowledge and skills can reduce the wealth of HNW individuals, especially at times of inheritance procedures. Private Insurance, however, provides the right tools to avoid this risk.

“A substantial wealth does not necessarily indicate competence and knowledge, even if wealth can potentially influence positively the level of financial literacy. In fact, even if there exists a correlation between wealth and financial competence, as highlighted by the Financial Education Research Unit at the Bocconi University’s Baffi Center, it does not imply that being rich is sufficient to be financially educated.

On the contrary, a higher wealth standing typically implies greater complexity in wealth management, especially when it comes to succession planning. In this delicate phase, personal, business, and often emotional financial interests intertwine. A combination of factors that, in the absence of the necessary tools to manage them, can lead to the diminushment of the assets.

“”For this reason,”” explain the experts at Octium, “”HNW individuals need competent professionals by their side, capable of adopting the best strategies and the most appropriate tools to meet their planning and protection needs.””

The Risks of Poor Financial Literacy for HNWIs

The lack of financial awareness among HNWIs can stem from various factors: increasingly hectic work and life schedules, greater attention given to the creation or accumulation of wealth rather than its management, or simply a lack of interest in the subject matter. “”However, financial education is crucial for sound financial management,”” observe the experts, “”especially when it comes to planning succession and protecting wealth for future generations.””

It is in this context that, according to Octium, that wealth management professionals must intervene. “”Firstly, ignoring the importance of proper financial and succession planning could result in a lack of diversification within the assets, exposing it to excessive risks. Secondly, the tax aspects of succession must be considered: a lack of knowledge about the tax burdens on the transferred assets and heirs could erode the assets and create non-financial problems for them. Finally, the lack of planning could burden, sometimes severely, the asset transmission process, creating disagreements among heirs and often causing a dissipation of the estate itself.””

The Benefits of Private Insurance

Among the tools that wealth management makes available to high net worth clients and the professionals who assist them, there are those of Private Insurance, particularly unit-linked life insurance policies. “”These,”” explain the experts, “”play a crucial role in any succession planning process. Life policies, if constructed and tailored to the characteristics and wealth needs of each client, can help advisors and their clients resolve or entirely avoid the aforementioned issues.””

These instruments allow policyholders to diversify their capital by investing in different underlying categories, in line with the client’s profile and risk appetite. At the same time, the policy protects what is legally invested from foreclosure and seizure scenarios.

But that’s not all. “”Even from a tax planning perspective, life policies can be used to mitigate the tax burdens on the assets. In fact, the amounts set aside in the policy constitute a separate estate from the inheritance and are therefore exempt from inheritance tax,”” add the experts.

Finally, the policyholder of an insurance contract can freely designate the policy beneficiary. In this way, they can use the life policy to allocate the assets more flexibly to their loved ones, whether they are legal heirs or in the will of the deceased. “”Furthermore,”” note the experts, “”since the capital in the policy is not considered part of the inheritance, it can be immediately transferred to the designated beneficiaries, avoiding the complexities and delays associated with traditional succession.””

In Conclusion

Poor financial literacy can have serious consequences for succession planning and wealth management, especially in the presence of substantial capital. Unit-linked life policies, as a form of Private Insurance, offer an effective means to improve financial management, allowing for greater diversification, optimizing tax planning, and simplifying the transmission of wealth. “”Since life policies play a fundamental role in safeguarding the heritage and financial future of future generations, HNWIs and the professionals who assist them can find in Private Insurance like Octium a valuable ally for implementing an optimal succession strategy,”” conclude the experts.”

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