For wealthy Africans the value of holding international, hard currency life cover might not seem obvious at first. But dig a little deeper, consider the rollercoaster nature of African currencies and legacy planning considerations, and the picture shifts.
For anyone doubting the value of hard currency life cover in the African context, Harare-based Andrew Moore, MD of Carrick Wealth Zimbabwe, offers a chilling example.
It was 2009 and Zimbabwe adopted the US dollar as its main currency. During this time Zimbabweans were contributing to their local life cover policies in US dollars. In 2015, when the country effectively ran out of US dollars, everything shifted back to the local dollar. “Initially this happened at one-to-one [one US dollar to every Zimbabwe dollar], although the actual value of what policy holders had contributed was a lot more,” explains Moore. “Today it’s probably about 120 to one, at least. If a client had US$1 million worth of life cover that is now probably worth less than ZWD 100 000.”
With the exchange rate widening and premiums rising, many Zimbabweans had to stop their life cover contributions, losing both the cover and all the premiums paid.
“If this can happen in Zimbabwe it’s also a very real risk for any African jurisdiction,” says Moore.
The solution is to hold an international life cover policy, which guarantees a payout to your family in the same currency as your contributions, such as US dollars. “It’s not going to be converted to some monopoly money as has happened in Zimbabwe,” explains Moore.
What are the advantages?
Peace of mind is always a major motivator when it comes to life insurance; and an international policy is no different – but this option comes with the advantage of guaranteeing that your beneficiaries will ultimately be paid out in hard currency, be it US dollars, euros or pound sterling.
“This is how a lot of wealthy people transfer life through generations,” explains Moore. “They find they have an excess, they can afford high premiums and they often find that the value of the life cover would probably be at least triple what they’ve actually paid in. So as a transfer of wealth it can be a very effective planning tool.”
If you make use of the services of a professional wealth management firm, it is also possible to structure your life cover to build a tax efficient structure into the product to ensure the smooth transition to your beneficiaries. Moore explains that it is also possible to take the grudge out of the purchase with clever financial planning. “What I’ll often do with life cover, if I’m doing term based, is tag an additional product onto it so you get all your premiums back in the end,” he says. “So, you end up with a bit of a nest egg.” It is also possible to add on disability cover or critical illness cover.
How do costs compare?
While costs vary from country to country, and it is imperative to do a proper comparison between local and international products, Moore says international is often cheaper. He adds: “Of course, this depends on the type of life cover you choose.”
You could select term-based life cover (which is cheap and cheerful, akin to insuring your car) or whole-of-life cover (which keeps going until your death). Currently, wealthy African clients are showing increased interest in international life cover from a term-based perspective, and less so from a whole-of-life approach, which is more expensive and retains the majority of its benefits for the eventual beneficiaries.
Getting international life cover
If you are interested in exploring hard currency life cover options, the first step is to speak to a registered life insurance company that is registered internationally. Carrick Wealth has performed extensive diligence and has three international, highly reputable and regulated companies on our panel of approved providers.
Moore also recommends spending time with your financial advisor to determine how much cover you require, given your life circumstances, responsibilities and debt commitments. “It is one thing saying that you need life cover, but knowing how much you need is a more complex exercise. It is our role to help you identify how much cover you need and the type required,” he says.