Life Insurance for High-Net-Worth Individuals

If you are a high-net-worth individual (HNWI) you already know how your life insurance can support your family, safeguard your inheritance upon your passing and support charities that are close to your heart.

But did you also know that life insurance can be used to protect your business, enhance your investment strategy and mitigate your estate taxes? It makes sense — much like insuring a house, car or other valuable assets, insuring your income is a smart move if you earn a high salary. 

However, the best type of life insurance considerations for you will depend on what you’re trying to protect and your financial goals. At times, a combination of different types of policies can provide the right amount of financial protection for people with high coverage needs. In this article we will explore different types of life insurance, considering your specific needs and financial goals. By understanding the nuances of each policy, you can create a well-rounded coverage plan tailored to your circumstances.

Defining short and long term goals

Beyond providing for your family’s financial needs after you’re gone, life insurance can serve several strategic purposes including business protection. For example, if you co-own a company, life insurance becomes a crucial safety net. Through what’s called a buy-sell agreement, life insurance ensures that if one partner passes away the surviving partner can purchase their share, thus preventing financial instability.

Moreover, certain permanent life insurance policies come with cash value accounts which can protect against stock market volatility for safe investments. While traditional investment accounts might promise higher returns, the cash value in some life insurance policies provides a more predictable albeit usually lower return.

For individuals whose assets exceed $13.61 million, estate taxes can potentially be as high as 40%, potentially diminishing the inheritance left to their families. Life insurance with a death benefit – that matches or exceeds the expected tax obligation – can effectively counterbalance these taxes, ensuring the preservation of your family’s wealth.

Considering the challenges for those with significant assets, exploring the best life insurance options becomes essential. So, what can we learn from how HNWI use life insurance policies?

Term Life Insurance

Term life insurance is suitable if you want to provide your family with financial support or replace your income in case of your unexpected passing. Financial advisors often suggest a life insurance policy worth 10 to 15 times your salary. However, the ideal coverage for you depends on your personal finances, including assets, debts, household income and dependents. Keep in mind larger insurers tend to offer policies with higher coverage amounts which could be beneficial.

Permanent Life Insurance

For those seeking a guaranteed death benefit and a method to accumulate tax-deferred savings, permanent life insurance with a cash value component might be the better choice. High earners who have maxed out their tax-deferred savings accounts, such as 401(k)s or Roth IRAs, may find value in whole life insurance or similar permanent policies. These often include a cash value that grows at a fixed rate providing a stable investment. However, it’s important to weigh the higher cost compared to term life insurance and potential investment risks. Premium payments are significant and must be maintained for an extended period of time to fully benefit from the policy.

Irrevocable Life Insurance Trusts (ILITs)

Incorporating trusts into your estate planning can be advantageous, especially with life insurance. An ILIT is a trust that, once established, cannot be changed or canceled. It serves as a separate entity that owns assets like your life insurance policy, becoming the policyholder. Upon your death, the death benefit is placed into the trust and distributed to your beneficiaries as per your wishes. An ILIT helps ensure quick death benefit claims by your heirs and keeps the insurance proceeds outside your taxable estate, effective if established more than three years before your death. This strategy is particularly useful for passing wealth to your children while minimizing tax implications.

A policy review today can save you hassle later

Ultimately, using life insurance as a tool for wealth generation involves strategic use of both term and permanent policies. Term life insurance safeguards your family’s financial future, covering estate taxes and protecting assets, effectively preserving wealth. Conversely, permanent life insurance offers a unique avenue for wealth accumulation, allowing policyholders to access cash values, potentially tax-free, supporting a broader investment strategy.

For high-net-worth individuals (HNWIs), specialized HNWI life insurance policies can address specific gaps in coverage and protection. Stratus Policy Analyzers®, a life insurance policy review service, can identify areas where your current policies may fall short. Our unwavering commitment is to help both businesses and consumers secure robust coverage. Call us today.

Comments are closed.