Preserving the Wealth

Building wealth is only half the job; a family can lose it through the death or disability of an earner, a lawsuit, a long retirement, steady inflation or a currency move. This module analyses the risks to human capital and the insurance and annuity tools that transfer them, shows how inflation and taxes together erode purchasing power and which assets defend it, and explains how exchange rates affect a private client whose assets, liabilities and spending sit in different currencies.

Start this lesson free Practice questions

What you will learn

1. Analyze the risks to a client's human capital and other personal risks, and recommend insurance, annuity and other strategies to manage them, including how much life insurance a family needs.

Personal risks: premature death, disability, unemployment, longevity, health costs, property and liability.
Manage each risk by avoiding, reducing, retaining or transferring it; wealthy families retain small risks but insure catastrophic ones.
Term life is cheap pure protection for earners; permanent life serves estate liquidity and transfer planning.
Human life value = PV of the family's share of after-tax earnings; needs analysis = PV of needs - existing resources.
Own-occupation disability cover matters for specialists; life annuities transfer longevity risk at the cost of liquidity and bequests.

2. Recommend planning and investment approaches that protect a client's purchasing power from inflation, including the combined effect of inflation and taxes on real returns.

Plan in real terms with the family's own inflation rates (health, care, education often exceed CPI).
Real after-tax return = [1 + r(1 - t)] / (1 + inflation) - 1; taxes on nominal returns deepen the real loss.
Inflation-linked bonds protect if held to maturity but fall in price when real yields rise.
Equities protect over long horizons but not reliably against inflation shocks; cash and long nominal bonds are most exposed.
Match near-term spending with laddered linkers and long-term goals with growth assets; use indexed annuities where available.

3. Explain how exchange rates affect a private client's asset allocation and financial plan, and recommend ways to reduce currency risk, including matching assets to the currency of future spending.

Home currency = the currency of future spending and liabilities, which may differ from the country of residence today.
R_DC = (1 + R_FC)(1 + R_FX) - 1; currency volatility adds to local volatility, adjusted for correlation.
Hedged return is about R_FC + (i_DC - i_FC); hedge foreign bonds fully or mostly, equities partly.
Fund near-term goals in their own currency and shift gradually toward the currency of a planned move.
Avoid debts in currencies without matching income or assets; pegs reduce volatility but can break.

Module at a glance

Human capital faces mortality, morbidity, earnings, longevity, health and liability risks; retain small risks, transfer catastrophic ones.
Life cover: needs analysis = PV of needs - resources; human life value = PV of the family's share of after-tax earnings.
Term life suits temporary family needs; own-occupation disability cover protects specialists; life annuities transfer longevity risk.
Real after-tax return = [1 + r(1 - t)] / (1 + inflation) - 1: tax on nominal returns deepens the inflation drag.
Inflation-linked bonds protect when held to the matching date; long nominal bonds and cash are most exposed to inflation surprises.
R_DC = (1 + R_FC)(1 + R_FX) - 1; home currency is the currency of future spending, not necessarily of residence.
Hedge foreign bonds largely and equities partly, match goal assets to goal currencies and avoid unmatched foreign-currency debt.

This free module has 3 lessons, 14 practice questions with full explanations and 1 essay case with a model answer.

Start the lesson