Always consider 'what if' scenario

Popular wisdom in Hong Kong tends to enshrine property ownership as the key element in any investment portfolio, but one of the repeated mistakes in managing personal wealth is to get swept along by this type of thinking.

Although the attraction of one's own home and the promise of escalating values are hard to ignore, it often makes better sense to focus initially on two main pillars of sound financial planning - protection in case of setbacks and a diversified platform to accumulate assets.

'We find it is common in Hong Kong for the mix of investments to be quite unbalanced, with people perhaps putting too much emphasis on getting a property first,' says Roger Steel, CEO of Sun Life Hong Kong. 'Therefore, we recommend they go through a proper financial needs analysis to identify real priorities and expose areas of potential concern.'

Guided by a qualified agent or financial planner, the process aims to be comprehensive. It might look, for example, at making provision for anticipated expenses such as children's education or care for elderly relatives. And, as sensitively as possible, it would ask the individual investor to consider various 'what if' scenarios.

Understandably, most people prefer not to dwell on the financial consequences of a serious accident or long-term ill-heath, but such issues can't be avoided.

'There is a responsibility to make sure that if something happens to the breadwinner, the family can keep going,' Steel says. 'We ask about 'life value' and likely future expenses for every member of the family. This makes it easier for customers to get the message and ensures they are really cognisant of the implications of something unexpected happening.'

Greater awareness generally leads to a new appreciation of the need for fuller protection through tailor-made life, critical illness or fixed-term insurance policies. And it tends to inspire new interest in the expanding range of investment-linked assurance scheme (ILAS) products, which include a protection element while also giving access to major investment funds specialising in different regions and industries.

'Of course, all these products should be sold according to needs and we would counsel that people talk closely with a financial adviser to understand what they are buying,' Steel says. 'But an advantage is that you can put all sorts of riders on the unit-linked products, which offers a lot of choice for customers.'

As an example, riders might relate to health or fixed-term insurance cover, and there is scope to discontinue or amend them in line with changing financial needs. Fund performance can be tracked online, and switching between funds is easy to execute. At present, Sun Life's ILAS platform includes 80-plus funds, a number seen as close to the logical limit to avoid confusing customers with unnecessary choices.

'There is a lot of visibility on the performance and control of funds through websites and related technology,' Steel says. 'But you can also increase the protection element with a term insurance rider or put in some critical illness cover, which will be deducted from the units' value.'

George Chew, vice-president for individual financial products at Manulife (International), also stresses the point that long-term wealth accumulation and successful retirement planning depend on having a holistic plan, not putting all your eggs in one basket.

'I believe that both life insurance and living benefits, such as critical illness and medical insurance, should form the foundation for any personal financial plan,' Chew says. 'Many people still underestimate the devastating financial impact that a serious health event can have on an individual and their family.'

Despite a reputation for being sharp investors, Hongkongers still typically allow an 'insurance gap' to develop. They try to assume the worst won't happen and hope that personal savings or cashing in mutual funds will see them through a period of hardship or unemployment.

'That is unlikely to be sufficient to cope with the implications of serious illness, disability or death, when this insurance gap could leave dependants in serious financial difficulty,' Chew says.

There is no one answer, but overall Chew suggests investors take a closer look at the benefits of term insurance. Policies are generally less expensive than full life cover and allow greater flexibility to suit different customer needs.

'This can appeal to individuals who really need protection but have a limited budget, such as parents with a young family,' Chew says. 'It can also appeal to people who may not need lifelong protection, allowing them to use the premium savings for other needs such as building wealth for retirement.'