7 reasons why wealthy people need life insurance
Financial advisers and coaches frequently ask me if wealthy people need life insurance. Couldn’t they afford to self-insure? My answer is always this: sure they could self-insure, but why would they want to? Life insurance gives them tremendous leverage: every dollar of benefit literally costs pennies. It makes smart financial sense to use life insurance to cover your needs, dreams, and obligations.
Also: people of means often need life insurance for reasons beyond the typical final expenses / family protection / mortgage protection / school funding. Here are some examples (please bear in mind that people with complex estates need professional advice to manage them.)
Asset protection
Estates that are larger than the estate tax exemption, get taxed very heavily. This bill is due pretty quickly. How to pay it so soon? They could sell off assets – maybe at a discount (:. Or, they could use the proceeds of a life insurance policy to pay the taxes due, and leave their assets intact.
Liquidity
What if the estate consists largely of illiquid assests? These could be real esate holdings, business interests, etc. It would take time to sell these off and get a decent return on investment. In the meantime, the surviving family would need cash. The proceeds from a life insurance policy would keep them liquid.
Debt relief
People wiith substantial assets can also have substantial liabilities, both personal and business. Why saddle heirs and executors with these obligations? Life insurance could cover them, with discounted dollars.
Estate distribution equalization
Let’s say they own a business. They have two kids. Their daughter is now part of the business, and will take it over when Dad dies. The son has his own career. What would he get? He could get a life insurance benefit equal to the value of the business Now each child receives an equal amount from Dad’s estate.
Charitable giving
If they are donating regularly to a charity close to their heart – it could be a religious congregation, or a foundation to promote health – they could bequest the organization a legacy gift. All or part of their annual contribution could be used to pay a life insurance premium. When they pass on, the charity would receive a substantial benefit.
Partnership agreement funding
Buy-sell agreements can call for pretty hefty buy-out amounts. How to come up with the cash? Sinking fund? Reserve account? Personal assets? Or: use life insurance.
Key person indemnification
Investments in businesses are investments in people. Businesses grow around key people- owners, partners, executives, technicians, salespeople. If one should pass away, where would the money come from – quickly -to keep current with bills and obligations, and buy the time needed to hire a suitable replacement? Life insurance.