Why Do Wealthy People Want Life Insurance?
4 weeks ago Ted Bernstein 0
Wealthy people, or High Net Worth (HNW) consumers, are buyers of permanent life insurance for many reasons. The reasons wealthy people own life insurance are different.
Income Replacement: Most people own life insurance to protect their income. It does not matter if your income is $100,000 per year or $1,000,000 per year. The need is the same. Nor does it matter if you are 35 or 55. If your family depends on your income, life insurance is one way to guarantee the loss of that income will not disrupt your family’s lifestyle.
Immediate Liquidity: HNW people own life insurance for many reasons, even though we often hear that “wealthy people have no reason to own life insurance”. The reasons may be different, but most wealthy people want life insurance to help their income and succession plans be more effective. Essentially, they are buying GUARANTEED infusions of liquidity at death. They typically purchase permanent insurance because, for them, it is the best life insurance you can own:
- Some wealthy people worry about the future when they could be less fortunate at the worst possible time.
- Others want guaranteed liquidity because the value of their assets fluctuates. One of my real estate clients in Miami has a net worth that can change by $10M every few years based on market conditions. If death occurs at the lowest point of these valuations, the family could be financially impacted and some assets might be sold at the wrong time. The liquidity provided by life insurance mitigates this threat.
- Many wealthy people have active businesses with one or more children working in the business. When some of the children are not working in the business, life insurance equalizes the inheritances for each child.
- More and more wealthy clients are leaving life insurance directly to each of their grandchildren. The insurance policy is simple, inexpensive and it’s a feel good purchase knowing what it will mean to each grandchild.
- Wealthy people have the ability to finance the life insurance premiums. When this makes sense, it can be a very effective way to create wealth and liquidity free of income, gift and estate tax.
Finally, these reasons are from the buyer’s perspective. From my perspective as an advisor, there is one reason that is under-appreciated. Oftentimes, there are elaborate plans in place to minimize taxes, protect the assets, transfer the wealth effectively, etc. In the cases, where the assets are comprised of homes, businesses and real estate investments, there is nothing like the infusion of liquidity provided by life insurance. It gives the advisors and the family time to execute the plan without fear, worry or stress. Too many times, without sufficient liquidity, anxiety creeps in and family members get nervous which can lead to litigation, confusion and disruption.
If you wish for your heirs to remain close after your death, add life insurance to your plans. Too many advisors are making recommendations only from the perspective of need. My experience suggests there is great value and appreciation for this liquidity once the life insurance is viewed as an enhancement to existing plans. It may be a cliche, but I have never heard a beneficiary or trustee complain about receiving millions of dollars of life insurance proceeds.
Please contact me at 561-869-4500 or email me at TB@LifeCyclePlanners.com about a complementary consultation including a review of your inforce coverage.
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Also published on Medium.