Do high net worth individuals need life insurance? This important subject examines if life insurance is necessary to safeguard the wealth and family of high net worth individuals.
Wealthy individuals who have a net worth of more than one million dollars have the ability to employ life insurance as a substitute for income, as an investment vehicle, or as protection against inheritance taxes.
People are often considered to be high-net-worth (HNWI) if they have a minimum of one million dollars in liquid or investable assets in their possession.
Even while high net worth individuals (HWNIs) could have considerable amounts of money stashed away in savings, this does not always mean that they do not need life insurance.
When determining the need for life insurance, one of the key considerations that are often taken into account is the possibility that the principal source of income will need to be replaced in the event that the primary earner passes away.
In the event that the market has a downturn, there is a chance that the projected financial resources that are planned for your family may see a significant drop in their amount.
Even if you have saved enough money to ensure the financial well-being of your family in the terrible event that you pass away, it is still a good idea to consider purchasing life insurance as an extra layer of protection for your financial strategy.
This is true even if you have no plans to die anytime soon.
The majority of people buy life insurance for the sole purpose of securing a lump sum payout that is free from taxes.
This money may then be used by the beneficiaries of the policy to pay off any outstanding debts and make provisions for their future financial requirements.
On the other hand, those who bring in a big annual income or have a significant net worth may be able to make efficient use of life insurance as a strategic device to protect an inheritance or offer financial support to their family.
This in-depth guide’s objective is to provide readers with an in-depth comprehension of life insurance that is specially catered to those who have a considerable net worth.
It investigates the many different policy options that may be used in order to create a protection strategy that successfully maximizes asset accumulation.
If you have any questions or want to invest as an expat or high-net-worth individual, you can email me (firstname.lastname@example.org) or use these contact options.
Table of Contents
Why Do High Net Worth Individuals Need Life Insurance
The desire to keep one’s wealth within one’s family via the inheritance of property and other assets by succeeding generations is one of the possible outcomes that might result from the accumulation of financial resources.
It is common practice for wealthy persons to purchase life insurance as a means of maximizing the value of their bequest after taking into account any applicable taxes.
In doing so, these individuals are able to improve the financial legacy they leave behind for their heirs and beneficiaries.
A life insurance policy has the potential to be used as an investment vehicle or to offer additional financial stability. Both of these uses are supplemental to the primary function of the policy.
Even while wealthy people are not the only ones who may benefit from purchasing life insurance, there are a variety of reasons why those with a higher net worth should seriously consider doing so.
Life Insurance is Favored by Tax Laws
Taxes are one possible issue that may operate as a motivating factor for those with higher income levels to get life insurance.
Life insurance is a way of protecting one’s assets by providing favorable tax treatment for both the premiums paid and the earnings received once a policy is paid out.
The receiver is not required to pay taxes on any money that they receive as a payout from a life insurance policy. Those with a bigger amount of wealth or those who desire to reduce their estate tax responsibilities may find this to be an appealing option.
According to the Internal Revenue Service (IRS), persons who possess estates with a value of $12.06 million or less are qualified to donate this sum to their heirs in the year 2022 without incurring any estate tax responsibilities.
This amount may be given to heirs without the payment of any estate tax. In order to account for the impacts of inflation, the monetary value is on an increasing trend and is projected to reach $12.92 million by the year 2023.
The money that is produced from a sizeable life insurance policy may be used by the beneficiaries of the policyholder to satisfy the tax burden of individuals whose estates have a value that is more than the threshold for exemption from inheritance taxes.
Additionally, estate taxes will not apply to the cost of insurance premiums. As an example, if a person sets aside $500,000 toward the purchase of a life insurance policy with a face value of $2 million, the first premium payment will be deducted from the estate and will not be subject to taxes.
This is because the death benefit of the policy will be considered a gift. When viewed from a different angle, it is possible to conclude that the value of the $500,000, after taking into account taxes, is equal to $300,000.
Consequently, after subtracting the estate tax of $300,000 from the premium amount of $500,000, the family is entitled to a guaranteed life insurance payout of $2 million for an expenditure of just $200,000. A return that is assured is ensured by the premium payment.
Life insurance Benefits Are Not Taxable
People or business owners who have a significant net worth often fall into the highest estate tax bracket, which currently sits at 40% of the total value of the decedent’s estate.
On the other hand, in the context of taxes paid to the federal government, life insurance is not a taxable source of income and is not subject to taxation.
It is crucial to note that while individuals may be forced to pay estate taxes to the state, profits from life insurance policies are exempt from taxation as a form of income by the Internal Revenue Service (IRS). However, individuals may be required to pay estate taxes to the state.
Life Insurance Provides Security from Declines in the Stock Market
People who have a high net worth are more likely to experience significant financial hardships when the economy and the markets experience downturns.
The purchase of life insurance may provide high-net-worth people (HNWIs) who are responsible for the financial well-being of others a feeling of comfort over the stability of their family’s finances in the event of their passing.
Life Insurance Offers a Tax-free Income Stream
One example of this can be seen in the fact that insurance policies tailored to those who already have a large amount of money often include a feature that enables the accumulation of further monetary value.
Certain types of insurance policies, such as whole life or universal indexed policies, have the potential to build up value over the course of one’s lifetime, which may afterward be drawn upon as an additional source of revenue.
The tax-exempt status of the dividends is conditional on the particular structure of how they are distributed.
Business Owners Can Benefit from Life Insurance
If an entrepreneur is a co-owner of a company, then life insurance might be utilized to help finance a buy-and-sell agreement in the event that one owner of the company was to pass away unexpectedly.
There is also the potential for a family business to benefit from purchasing key person insurance coverage.
This is a term that refers to the insurance policy that is purchased by a major individual working for a small business. This is often the owner, founder, or key people of the company.
In the sad event that crucial persons pass away before a suitable replacement can be found, the organization will have a safety net to fall back on thanks to the keyman policy.
The company will function as the beneficiary of the money and may put them to use for a variety of purposes, including actions related to the recruitment and education of replacement workers, the settlement of outstanding corporate obligations, or the meeting of ordinary operating expenditures.
Life Insurance Helps with Financial Difficulties
According to research that was carried out by Spectrum Group, the number of households obtaining a high net worth level in 2021 has increased significantly, going from 11.6 million in 2020 to 12.5 million in 2021.
This is a huge increase from the previous year. This demonstrates a significant increase of 8.1% over the previous year. In addition, the stock market has been reaching highs that have never been seen before.
Given the present state of affairs, one could be tempted to conclude that the favorable conditions will continue into the foreseeable future.
However, given the existence of hyperinflation, political unpredictability in international relations, and a rising real estate bubble, there is a potential that the economy may face a downturn at any given moment, which would result in a considerable drop in one’s net worth.
This would be the case because of the increasing bubble in the real estate market. Individuals with high net worth, such as yourself, may benefit from the risk management protection that life insurance may give.
Life Insurance is a Valuable Asset
There is more to life insurance than just a payment in the event of the death of the covered person. It is dependent on the particular form that insurance policies take as to whether or not they have a monetary value or an intrinsic value.
The accumulation of cash value is a feature that is standard in some types of permanent life insurance policies. These policies are designed to provide continuous protection for the whole of an individual’s life.
Therefore, in situations where the insurance policy is seen to be superfluous, it may be liquidated via a procedure known as a life settlement if it is shown that the policy was purchased in error.
When it is set up correctly, a whole life insurance policy has the potential to provide tax-free payouts on a regular basis.
This indicates that the policy has the potential to produce more money, in the event that it is considered necessary to do so. The cash value of the insurance also builds up over time and may be utilized to cover college expenses or other financial responsibilities during one’s career.
In the end, whole life insurance offers the security of a guaranteed payment upon the policyholder’s passing, regardless of the individual’s future health status.
It is of critical significance to provide financial stability over the long term for the family of the insurance policyholder as well as any successors.
People who already have a significant amount of money or those who wish to utilize life insurance as a form of investment could be interested in the benefits that have been discussed thus far.
Life Insurance May Finance Your Company’s Buy-Sell Agreement
What would happen to your company if one of the owners suddenly passed away due to circumstances beyond anyone’s control?
What are the possible repercussions? Individuals do not plan for an extreme and implausible circumstance such as the one described above; nonetheless, because of the inherent precariousness of human life, such a scenario is not only possible but has also been seen to take place.
A buy-sell agreement is a kind of contractual framework that outlines the method in which the distribution of a company’s assets will take place in the event that one of the firm’s owners becomes incompetent or passes away, so making them unable to perform their obligations.
This type of arrangement is also known as a “buy-sell agreement.” Buy-sell agreements may be financed through a variety of strategies, but one that has shown to be especially successful is purchasing life insurance.
In the event that a triggering event takes place, the use of the earnings from the death benefit serves the objective of eliminating the need that the owners to dedicate either their own personal funds or those of the company.
A divorce, the desire of a company owner to sell their shares and exit from the organization, and circumstances that require the removal of a business owner due to illegal acts are all examples of events that, in addition to death, have the potential to have substantial repercussions.
Types of Life Insurance for High Net Worth Individuals
The individual’s desired outcomes with regard to their finances should guide their choice of insurance.
If a person is concerned about the possibility that taxes would reduce the value of the assets they want to leave to beneficiaries after their death, it is a good idea for them to investigate the possibility of purchasing a sufficient quantity of term life insurance coverage to compensate for these expenses or to set up an emergency savings account.
A cash value life insurance policy, on the other hand, maybe a better choice for someone who is interested in growing the tax-deferred savings they already have if they are of the mind to investigate other strategies in this regard.
Term Life Insurance
The advice given by specialists is that an individual should get a life insurance policy with a face value that is at least ten to fifteen times their annual income at the very least.
However, it is important to remember that not all insurance companies are able to take on the monetary risk that is involved with paying out a death benefit that is worth a number of millions of dollars.
This is something that should be kept in mind. Investigate a well-known life insurance provider that is more likely to manage policies with high coverage levels in an effective manner and to provide support to policyholders.
The size of one’s wealth should be taken into consideration while searching for a reliable life insurance company to work with in order to reduce the impact of inheritance taxes.
There is a possibility that the tax requirements of one’s family members will need them to set aside a part of their income, with this percentage having the potential to reach a maximum of forty percent.
As a consequence of this, it is recommended to get an insurance policy that is both affordable and provides a death benefit that is either on par with or more than the amount of taxes that are anticipated to be owed.
Permanent Life Insurance
The majority of people will find that purchasing term life insurance is the most appropriate course of action.
On the other hand, individuals with high incomes who have already made the most of their participation in other tax-deferred savings accounts may wish to consider whole-life insurance or other permanent plans that create interest and accumulate monetary value over time.
A person’s savings may be protected against the turbulence of the stock market by using cash value accounts.
The returns on traditional investment accounts are often higher than the returns on cash value accounts, despite the fact that the cash value returns are characterized by a higher degree of predictability.
Permanent life insurance has a number of drawbacks, including the fact that it is far more difficult to understand than term plans and that it comes with a significantly larger premium, which may be anywhere from five to fifteen times higher.
It is highly advised that you seek the guidance of a financial advisor in order to establish the course of action that is most appropriate for your particular set of circumstances.
Irrevocable Life Insurance Trusts (ILITs)
If a person has a large amount of money, it is quite probable that they have already included trusts in their strategy for estate planning.
The term “irrevocable life insurance trust” (ILIT) refers to a certain kind of trust that is legally enforceable and cannot have its terms changed or canceled.
The major objective of this setup is to fulfill the function of a custodial entity for a life insurance policy.
As part of this arrangement, the trust will play the part of the policyholder, and a trustee will be appointed to be in charge of the policy’s administration.
In the case that a person passes away, it is the job of the trust to acquire the death benefit and then distribute the monies to the beneficiaries who have been selected by the trustee. This process takes place under the supervision of the trustee.
When the main purpose is to transmit money to one’s kids while also possibly giving some benefits in terms of inheritance taxes, the use of an Irrevocable Life Insurance Trust (ILIT) becomes favorable.
This is the case in situations in which using an ILIT becomes advantageous. To ensure that your trust is established in the correct manner, it is important to work together with a legal expert who specializes in estate law.
How To Increase Your Financial Security as a High Net Worth Individual with Life Insurance
Because it provides a way to bestow a financial advantage onto one’s surviving family members, the usage of life insurance has the potential to assist in the building of wealth across multiple generations.
This is because life insurance gives a mechanism to impart this benefit. As was said earlier, the death benefit that is given by life insurance may be used to satisfy any estate taxes that are owed in addition to protecting any assets that are still in existence.
When utilized as a component of estate planning, life insurance serves the primary objective of protecting current wealth rather than encouraging the acquisition of further wealth. This is because life insurance is paid for throughout the insured person’s lifetime.
In addition to their long-term nature, permanent plans have a cash value component. This feature gives policyholders the ability to take out loans against their plan’s accrued cash value, but only if the value reaches a certain minimum.
When one does this, they are effectively asking the insurance company for a loan, and as a result, they are letting the cash value keep accumulating interest.
It is essential to be aware that in the case of an untimely death, the amount of the death payment would be reduced by the amount of any outstanding obligations. This suggests that those who are awarded the funding will get a lesser amount than before.
It is common advice to seek the assistance of a financial planner first, and then a wealth manager, in order to devise a financial strategy that successfully caters to one’s goals in terms of the creation and maintenance of wealth.
This is because it may be difficult to devise a plan that does both of these things on one’s own.
How to Apply for Life Insurance as a High Net Worth Individual
The selection of an acceptable life insurance company for high-net-worth persons is largely dependent on the unique policy needs, as well as the preferences, of the individuals themselves.
A great initial step that one may do is to get the ball rolling on the process of getting and comparing life insurance quotes that are particular to the kind of life insurance policy that they are interested in purchasing.
It’s possible that the application process will include some extra steps, which are as follows:
Take Into Account Your Medical History
In the process of underwriting an application for life insurance, it is typical for the insurer to conduct a medical examination and review the applicant’s medical history.
This is done in order to determine the degree of risk that is involved with granting insurance coverage.
It is possible for individuals to have an influence on both their eligibility for life insurance as well as the rates that they are provided if they have a substantial medical issue or a family predisposition to medical diseases.
This is the case when an individual has a significant medical problem or has a familial predisposition to medical conditions.
Decide on Your Insurance Type
Take into consideration whether you want to apply for term life insurance or permanent life insurance before moving forward with your plans.
It is in your best interest to have a one-on-one conversation with a financial consultant or an insurance agent in order to have an in-depth comprehension of the sort of coverage that is going to be the most appropriate fit for your specific situation.
Designate Your Beneficiaries
Main beneficiaries are referred to as either a person or a group of people who have been specified to receive the death benefit in the event that the policyholder passes away.
Alternately, in the event that the person’s primary beneficiary passes away before the individual, the individual has the option of designating a secondary beneficiary.
In the event that people recognize the need for further knowledge, it is recommended that they have a discussion with a representative in order to get their expert opinions.
If a person wishes for their death benefit to be paid to their firm, it would be in their best interest to get further advice from a financial counselor or insurance agent in order to successfully traverse the necessary steps involved in this process.
In the sad event that the policyholder passes away, the person who is designated to receive the death benefit will be needed to commence the procedure of claiming the aforementioned benefit, just as is the case with other types of life insurance.
Individuals are needed to provide a death certificate in order to get the death benefit, and there is often a waiting time of around one month before they receive the money for the benefit.
There are typically three major ways in which the beneficiary of death benefits could receive them: via premium payments made in the form of a lump amount, through an annuity, or through ongoing premium payments.
How Much Life Insurance Should a High Net Worth Individual Get?
Life insurance is comparable to other forms of insurance, such as homeowner’s insurance, personal insurance, and liability insurance, from the perspective of management.
Specifically, life insurance is analogous to disability insurance. When trying to determine the proper degree of coverage necessary to suit their particular needs, individuals sometimes find themselves in a position of uncertainty.
Individuals who have more financial resources, as opposed to families living on a fixed income, may be eligible for greater flexibility when it comes to the level of coverage that they are able to acquire, since this may vary based on the amount of savings and investments that they have.
In general, it can be shown that a similar approach is applicable to both families with a moderate income and households with a high net worth and that the principle involves multiplying the annual income by a factor of 10.
Because of this, it is advised that an individual’s life insurance coverage be set at $50 million if their yearly income is $5 million.
This is because $5 million is the maximum sum that most life insurance policies will pay out. However, a number of financial consultants recommend that people with high net worth get life insurance policies with coverage that is equal to 20 times their annual salary.
This suggests that a salary of five million dollars would be sufficient justification for purchasing a life insurance policy with a value of one hundred million dollars.
Both the choice of an insurance plan and the calculation of the appropriate level of coverage that should be provided may be influenced by a number of different circumstances.
- Your past medical history and/or current state of health
- Personal concerns
- Who it is that you choose to have as beneficiaries.
- Any extra cost of living that you anticipate incurring in the near or far future
- Your chosen billing cycle
Financing your life insurance premiums is a specialist insurance approach that was developed exclusively for those with significant financial means, such as yourself.
Individuals are able to get a life insurance policy that has a sizeable cash value by using this specific strategy, and they do not have to make use of their own finances or any other types of assets in order to pay the related premium payments for the policy.
In addition, since there is a cash value component, it is feasible to repay the loan using the accumulated money that has been earned by the insurance over a period of time. This is made possible because the cash value component is there.
Regardless of a person’s current net worth or their rate of wealth accumulation, purchasing life insurance may provide a variety of benefits to that person.
When considering different options for life insurance, it is crucial to take into consideration the primary reasons for purchasing coverage, the estimated amount of coverage that will be necessary, and a preference for either term life insurance or permanent life insurance.
It may be easier to get an adequate life insurance policy if one does research on reputable life insurance companies and obtains online quotes for coverage. This may help ensure that the policy is in accordance with the person’s specific needs and financial circumstances.
Conducting a thorough comparison of the premiums charged by different life insurance companies as well as the protections and benefits that are included in their policies is the most efficient method for acquiring a life insurance plan that meets all of your criteria and offers appropriate protection for your loved ones.
An agent from Policygenius is able to do an exhaustive search on your behalf in order to get the coverage that is most suited for preserving your legacy.
No matter how wealthy someone already is, purchasing a life insurance policy adds an extra layer of financial protection to their entire situation.
Even in the unlikely event that one is absolutely confident that their descendants will not need the death benefit for their financial sustenance, a life insurance policy may still be used to reduce the amount of estate taxes owed or to supplement one’s resources for retirement.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 668.8 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.