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Life Insurance Considerations for the Wealthy

Wealth does not guarantee immortality, yet people generally live longer, which means they have to plan for their money for a longer stretch than ever before. The question for some is not whether they need life insurance but how to use life insurance to build wealth. Life insurance is one of many financial tools for protecting your wealth and ensuring your beneficiaries get their intended share. The notion that wealthy people don’t need life insurance is a misconception. Anyone may need life insurance depending on their circumstances, regardless of wealth. In this article, we’ll explore why life insurance for high-net-worth individuals can be a valuable tool.

Beyond the basics: life insurance and wealth

Does wealth protect you from needing life insurance? The primary purpose of life insurance is to give your loved ones a financial safety net when you die. A life insurance policy gives you the peace of mind of knowing your beneficiaries will have the funds to continue their current lifestyle after you’re gone. High-net-worth individuals have different objectives when they decide to buy life insurance than those who are primarily looking to provide a financial safety net for their families once they pass.

For the wealthy, life insurance extends beyond providing a death benefit. It is a highly effective planning tool that provides a variety of strategic benefits and advantages in estate planning. The wealthy use life insurance to preserve their assets and legacy once they are no longer present.

Benefits of life insurance for wealthy individuals

In their overall wealth management strategies, affluent people commonly consider the versatility of their life insurance policies.

Here are some of the purposes a wealthy individual might use their life insurance for and their associated benefits:

  • Loans. Borrowing from themselves by taking a loan from the cash value.
  • Estate planning. Covering funeral expenses, transferring wealth, reducing taxes.
  • Business continuity. Protecting businesses and business partners and the family’s interest in the business.
  • Charitable giving. Naming a favorite charity as the beneficiary and gifting a large sum to them upon the insured’s death.
  • Supplemental retirement income. Using cash value to fund an annuity that provides monthly income or buying a lower premium term policy and investing the savings in a tax-advantaged retirement account.
  • Liquidity for beneficiaries. Giving beneficiaries a large payment immediately after death as it may take time to sell real estate or other valuable assets.
  • Living benefits. Utilizing riders to provide living benefits such as nursing home care or at-home care in the event of a critical or terminal illness.
  • Additional layers of protection. Utilizing riders to provide additional coverage for a spouse, children, or grandchildren or due to an accidental death.

These purposes and benefits demonstrate how life insurance can be a part of a comprehensive wealth management strategy and how to use life insurance to build wealth.

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Understanding different life insurance options

Does term life insurance vs. whole life for wealthy clients make a difference?

Term life insurance is designed to provide financial protection for short-term debts like a mortgage or a student loan. The coverage lasts for a specified term (usually between 5 and 20 years) and then ends. Because the coverage is temporary, the premiums are lower than for permanent life insurance policies.

Whole life, universal life, and final expense life are common types of permanent life insurance policies. These policies are designed to protect an insured for their entire life.

Permanent life insurance policies accrue cash value. This means the insurance company puts part of the premium payment into a separate account that gains interest. Insureds can use the cash value in various ways.

These are some of the options for using cash value in a permanent life insurance policy:

  • Withdrawing cash value or taking a loan from it and repaying it later
  • Using it to pay the premiums
  • Surrendering the policy and reinvesting the cash value into an annuity that would provide a monthly income payment

A wealthy individual may use either term or permanent life insurance or both as part of financial planning.

Using life insurance to build wealth

Can life insurance make you rich? Not on its own, but it can be one component of a financial plan.

Permanent insurance policies accrue cash value. Whole life policies grow interest at a guaranteed rate, which can add to wealth. By contrast, the cash value for universal and variable life insurance products fluctuates with the stock market and can grow wealth faster, however, policyholders can also lose money.

The right coverage for your wealth

Life often has ups and downs that can affect our finances, and that’s also true for wealthy individuals. As our lives progress through various stages, our finances change with them. A life insurance policy can help people of all income levels weather evolving financial needs regardless of their circumstances.

Considering the many different types of life insurance policies and the uniqueness of each individual’s finances, it’s not always easy to identify the right type of life insurance in a sufficient amount.

An excellent place to start is to consider the purposes for buying life insurance we’ve outlined here and how the benefits will help you achieve your financial goals.

For wealthy individuals who want to learn how to use life insurance to build wealth, a financial advisor can review your circumstances and factor your estate’s size, desired benefits, and budget and come up with a plan.

Once you’ve decided, it’s important to review your life insurance policies at least annually or any time your wealth and family situations fluctuate.

Wealthy and wise: life insurance considerations

Wealthy individuals consider other factors beyond the type of life insurance policy, face amount, and benefits. For example, a life insurance payout isn’t considered gross income, so your beneficiaries won’t have to pay taxes on it. This is a significant benefit for a highly taxed estate. That said, the interest gained on a life insurance policy is taxable and must be reported as taxable income.

Beneficiaries can reduce estate taxes with life insurance death benefits as they’ll receive payment quickly after your death. They can also use it for funeral expenses or other short-term obligations. Access to funds will also allow them more time to sell items or property.

Life insurance can fill the gaps in financial plans, making it a valuable component of estate planning. Overall, wealthy policyholders can leverage a life insurance policy for loans, business purposes, retirement income, living benefits, and charitable giving. They can also use life insurance to create liquidity to customize their estate planning.

Life policies offer financial protection for individuals and business owners regardless of how much wealth they’ve accumulated at the time of their death. Due to the intricacies of each person’s assets and finances, consulting with a financial advisor who can put together a responsible plan to suit their needs is helpful.


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