For the wealthy, those desiring to become so, or anyone working towards increasing their net worth, life insurance is one of the few choices that almost all wealthy share in common. There are a number of reasons that the rich choose to do so but the reasoning for it can help nearly everyone.
Primarily speaking the big reasons for using life insurance, specifically whole life insurance for high net worth individuals or businesses, is due to tax advantages be it while alive or through estate planning.
Life insurance serves to protect commercial interests as well as collateral to fund a business loan, key employees, and fund buy-sell agreements.
A big part of getting life insurance is figuring out how much is needed by looking at how many assets one has or a business has. If you do own a business what will you do with it if you pass away? Is it going to pass on to your heirs, or is another plan in place?
If the family is not going to be a beneficiary to it then a buy-sell agreement can help. This type of policy is bought by the owners in order to help protect against the uncertainties that losing a business part may cause to its operations.
Life insurance is tax-favored
Taxation is a huge thing to consider when running a business. One major rule I’ve heard from those in business is “Stay profitable”. There are tax laws in place that give life insurance premiums and their proceeds tax benefits which helps create protection for a business.
I’m somewhat simplifying this when I say you can look at using life insurance within a business as a funding source, where you transfer money within accounts to help operate and grow the business. Think of it as an extra step to your financial plan, not an extra expense. A large portion of the money you put into a properly structured whole life insurance policy can be used and accessed very quickly.
Estate tax considerations
If you are an individual with an estate of about $11.5 million or less, or $23 million as a couple then you can leave that to your beneficiaries without paying estate taxes (those are rough numbers from 2020 and things may have changed so check with an accountant, tax attorney, etc). Something else that heirs may choose to do is use the proceeds of a life insurance policy to pay a tax bill that has an estate surpassing the exemption limits. Generally speaking also, any dollars spent on life insurance aren’t taxable so long as they are after-tax dollars or possibly as a business expense.
Each state has slightly different rules when it comes to estate taxes so those looking at whole life insurance due to high net worth are wise to do so as it can help the transition of wealth. That being said one other thing to consider is that of creating trust.
Without trust, things can get really tricky especially if the state needs to get involved. If this happens up to 40% estate tax can occur. If this happened to you what would your plan be? It’s not unheard of to have estate sales just to pay the taxes incurred by someone passing away.
Typically speaking life insurance is tax-free to a beneficiary so as not to create a hardship for them when they receive it. That being said it is wise to make sure you consult a tax and life insurance professional to ensure that your assets are properly taken care of and separated so your family doesn’t have to pay taxes on the life insurance part.
Creating a legacy
You’ve spent years building your business and now what will you do? When you pass away you don’t want it to just disappear and go away being sold off to the highest bidder. If this is you then what is available?
One thing you could consider instead of a lump sum style payment to your heirs is that of a legacy payment. With this option, you decide if they are going to receive monthly or annual payments. This can also help lower how much the family pays in taxes. A number of different legacy payments are available to whole life insurance high net worth policies.
General thoughts on life insurance
A large part of us has created the belief that life insurance is not necessary, is bad, or isn’t worth the money. The consequence of this thinking is that we continue doing what we are doing, and receive what that perspective warrants: scarcity.
The traditional financial mindset is that we work for 30 to 40 years, pay into a retirement account and get out of debt. The trouble with this mindset is quite simple: it doesn’t work for the purpose we all think it’s going to achieve.
What purpose is that you say? Specifically to have no money worries. Look around, ask your friends, family, and anyone you know that’s retired, do they worry about money? The resounding answer is yes. So if the outcome of the activity doesn’t achieve what we want then why do we do it?
Applying that to life insurance then: if the wealthy use whole life insurance to benefit their finances we would do well in figuring out how to do the same for our own lives as well.