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Individuals who own at least $1 million in liquid or investable assets are typically considered high-net-worth individuals (HNWI). HWNIs may have a significant amount of money saved, but that doesn’t necessarily eliminate the need for life insurance. Typically, one of the biggest considerations for life insurance is income replacement if the main breadwinner passes away. If the market experiences a downturn, the money you expect to leave your family could decrease significantly. And even if you have enough money saved to protect your family’s finances in the event of your death, you may want to consider life insurance as a buffer to your financial plans.
Do high-net-worth applicants need life insurance?
Even high-net-worth individuals can experience significant financial strain from economic and stock market downturns. If you have dependents as an HNWI, purchasing life insurance can give you peace of mind that your family or dependents will be protected.
Another reason high-net-worth individuals might consider life insurance may be to help pay for estate taxes. Estate taxes are taxes on a person’s assets after death if their assets exceed a certain threshold. The estate tax rate can reach up to 40% on the federal level for assets over $12.06M, while state tax percentages and exemptions vary. For example, in Oregon, estate tax rates start at 10% and can go as high as 16%, while the state estate tax exemption only applies when the taxable estate assets are less than $1M.
If you are a business owner or co-owner, life insurance can also protect your assets through a buy/sell agreement if you have a sudden death. A buyout agreement is a contract funded by life insurance that can help minimize the financial impact caused by the death of a business owner or partner.
Life insurance for high-net-worth applicants
Life insurance may be beneficial to high-net-worth individuals for a few key reasons, depending on their circumstances and financial plans for the future:
- Tax-free borrowing: Life insurance’s cash value can be used as a resource for tax-free borrowing at low rates. Whole life insurance may also provide tax-free dividends.
Protect your business: By enrolling in life insurance as an entrepreneur, business owner or partner, you can protect your part of the business through a buy/sell agreement or a cross-purchase agreement.
A cross-purchase agreement is a formalized agreement in which the business owner’s heirs will sell the deceased’s stake in the company back to the business. The proceeds will go to the beneficiaries, who will receive their share of the company value. This also protects the company from new owners coming in and disrupting the business.
As with all life insurance policyholders, the beneficiary will need to claim the death benefit from your life insurance in the event of your passing. To receive the death benefit, they’ll need to present a death certificate, and may have to wait for a month or so before receiving the payout. The three primary ways your beneficiary can receive the death benefits are through lump sum premium payments, an annuity or periodic premium payments.
Term life insurance
Unlike permanent life insurance, term life insurance only lasts for a specified number of years and is typically much cheaper than permanent life insurance. Term life insurance guarantees financial protection for your loved ones for a specific amount of time, usually between 10 and 30 years. If you decide to go with term life insurance, you will just pay a monthly or annual premium determined by your policy details. If you die before your term ends, your beneficiary will receive a death benefit. When the term is up, the policy will expire and your beneficiary will not receive a death benefit. However, you may be able to convert your term life insurance policy to whole life insurance if you still want coverage when your term ends. Keep in mind that there is usually a deadline for conversion, though, so you’ll want to understand your policy’s terms.
Term life insurance is most commonly used by high-net-worth or other individuals to pay for any outstanding debt, funeral costs, bills or similar expenses. There is no cash value component to term life insurance, so you would not be able to access the money you put into your premiums while you are living.
Permanent life insurance
High-income or high-net-worth individuals who already have a large cushion in savings may prefer to apply for permanent insurance because the policy stays in force as long as you pay your premiums and offers a cash value component that can work as a vehicle for low-risk investment and tax-free borrowing at low rates. Some policies come with a baseline dollar amount of guaranteed returns and cap your returns at a certain number.
Applying for life insurance as a high-net-worth applicant
If you are a high-net-worth individual, the search for the right life insurance company will largely depend on your policy needs and personal preferences. Obtaining and comparing life insurance quotes for the type of life insurance policy you are looking for is a great way to start. You can also use a life insurance calculator to determine how much life insurance you need. Here are other steps that may be involved in the application process:
- Consider your medical history: When applying for life insurance, the insurer will typically check your medical history and require a medical exam to determine the risk involved in insuring you as part of the underwriting process. If you have a serious medical complication or a family history of medical issues, your life insurance eligibility and rates will likely be affected.
- Choose your policy type: Determine whether you want to apply for term or permanent life insurance. It may be best to speak with a financial planner or an insurance agent directly to understand which policy type better suits your situation.
- Designate your beneficiaries: The person (or persons) who will receive your death benefit after you die is your primary beneficiary. However, you can also designate a secondary beneficiary in the event that your primary beneficiary dies before you. If you feel you need more, speak with an agent about what they recommend. If you want your death benefit to pay out to your business, you may want to ask for extra help from a financial advisor or insurance agent during this process.