If you own at least $1 million in cash or assets apart from the property value of your home, which can easily be converted into cash, you are considered a high-net-worth individual. Most high-net-worth individuals have a good amount of savings in their account and investments. This does not eliminate the need for life insurance, however.
Savings and investments are one part of the equation, but high-net-worth individuals may also need to account for liquid assets such as businesses, real estate, property and collectibles when considering financial protections for family members you may leave behind. Money can be lost at any time, especially in the event of a global catastrophe. The last thing you would want is to face financial hardships that you are not adequately prepared for. One way to mitigate financial pitfalls arising from your untimely demise and to manage risk, even for high-net-worth individuals, is to obtain life insurance.
Do high-net-worth applicants need life insurance?
History has shown that there will always be a time where even the wealthy will experience some financial damages based on economic and/or political turmoil. Life insurance can help all those with dependents, including high-net-worth individuals, in protecting their assets and securing their family’s finances.
One reason high-net-worth individuals might consider life insurance may be to save on 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 range up to 40% on the federal level, and states have their own tax percentages that vary. Although life insurance is considered taxable at the estate level, it is not taxed as income to the beneficiary on the federal level. However, in some states, the state estate tax exemption may be lower. For example, in Oregon, the state estate tax exemption is $1M per person, instead of the federal exemption of nearly $12M per person.
Another reason that a wealthy individual might consider life insurance is for its uses beyond just a death benefit. Life insurance can also have a cash value component, or offer lifetime coverage.
For example, whole life insurance can provide dividends and is tax-free, which means it can build up and provide an additional income benefit. Whole life insurance also guarantees your dependents a death benefit regardless of your health.
If you are a business owner or co-owner, life insurance can also protect your assets through a buy/sell agreement in the event 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 can be beneficial to high-net-worth individuals for a few reasons, depending on their circumstances and financial plans for the future:
- Because of life insurance’s cash value, it can be seen as another long-term investment plan. Whole life insurance provides dividends that are tax- free which is another stream of income that you would be able to rely on.
- 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 through 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 heirs, 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 policy holders, the beneficiary(ies) will need to claim the death benefit from your life insurance in the event of your passing. Your life insurance company will verify the information and the beneficiary will receive the death benefit within 30-60 days, depending on the provider. The three primary ways your beneficiary can receive the death benefits are through a lump sum payment, an annuity or through installment payments.
Term life insurance
Unlike whole or permanent life insurance, term life insurance only lasts for a specified number of years and is typically more affordable than whole life insurance. Term life insurance guarantees financial protection for your loved ones for a specific term before it expires. You can choose the term period which is usually from 10 to 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.
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.
Permanent life insurance
High-income or high-net-worth individuals who already have a large cushion in savings may prefer to apply for whole life or another form of permanent insurance because of its cash value component that works as an investment plan through cash gains. These cash value accounts are tax-free and are not impacted from the volatility like other investments from stock, funds, etc. If you are a young, high-net-worth individual, whole life insurance will likely be cheaper. However, permanent life insurance can be more complicated and may not be necessary for the long term, depending on your financial plan.
Since permanent life insurance is valid for your entire life, it can cover more than just the costs of bills, funeral expenses, debt or other short term expenses that term life insurance more commonly covers. It also offers tax-free cash value that can be distributed monthly or annually. Lastly, in the event of your death, your beneficiaries will receive more cash value in death benefits.
Applying for life insurance as a high net worth applicants
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 policy you are looking for is a great way to start. You can also use a quote calculator to determine how much you should be paying. 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 to determine the risk involved in insuring you as part of the underwriting process. If you have a serious medical complication or if a family history with any serious medical implication your life insurance rates will likely be affected.
- Choose your policy type: Determine whether you would 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, if your primary beneficiary dies before you, then you can have a secondary beneficiary. If you feel you need more, speak with an agent about what they recommend.
- Determine billing schedule: Most life insurance companies allow you to choose to pay monthly or annually. Paying monthly may give you more flexibility with any budgetary concerns, but many companies will give a discount for paying annually.
Frequently asked questions
Could life insurance be an asset?
Depending on what type of life insurance you get, it can be an asset. If you get term life insurance, since it only pays out after you die, it is not considered an asset. However, if you get whole or permanent life insurance, the cash value is considered an asset.
What happens if my primary beneficiary dies before me?
Many life insurance holders designate an additional beneficiary or two in case anything happens to the first. The primary beneficiary is considered the first beneficiary of the death benefit. If they die before you, your death benefit would then be designated to the secondary beneficiary.