Life insurance for high net worth applicants

Do high-net-worth individuals need life insurance?

Life insurance may be crucial for people of all types, but HNWIs may have unique considerations that could make adequate life insurance coverage especially important, including: 

Stock market downturns: High-net-worth individuals may experience significant financial strain from economic and stock market downturns. If you have dependents as an HNWI, purchasing life insurance may give you peace of mind that your family or dependents may be financially protected.

Estate taxes: 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 percent on the federal level for assets over $12.92M, while state tax percentages and exemptions vary.

Business protection: If you are a business owner or co-owner, life insurance may also protect your assets through a buy-sell agreement if you die suddenly. A buyout agreement is a contract funded by life insurance that may help minimize the financial impact caused by the death of a business owner or partner.

Additionally, a cross-purchase agreement (which is a type of buy-sell 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 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.

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. However, there are a few types of life insurance policies that HNWIs may consider, depending on their needs and financial goals.

Term life insurance

Term life insurance provides coverage for a specific number of years (called the term). Terms usually last between 10 and 30 years. If you pass away while your term is active, your beneficiaries will receive the death benefit, provided all the conditions of the policy have been met. If you outlive your term life insurance policy, then your policy expires, and your beneficiary does 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. There is usually a deadline for conversion, though. 

HNWIs may want to consider term life insurance if they: 

• Have a significant amount of debt that their dependants would have a hard time covering without their income, such as a large mortgage or other jointly-owned properties with a loan balance
• Have children who would need additional financial support until they become adults
• Only need the financial protection of a life insurance policy for a set number of years 

Permanent life insurance

Permanent life insurance is designed to remain active throughout your entire life as long as premiums are paid. Permanent life insurance is typically more expensive than term, but it comes with benefits not found with term life insurance, such as a cash value component. HNWIs who already have a large cushion in savings may prefer to apply for permanent insurance because this cash value component may work as a vehicle for low-risk investment and tax-free borrowing. 

HNWIs may want to consider permanent life insurance if they: 

• Are looking for an investment vehicle, although it should be noted that returns may be small (if earned at all)
• Would like to borrow from their life insurance policy
• May find peace of mind that their life insurance policy will be active for life as long as the conditions of the policy are met
• Don’t mind paying higher life insurance premiums to gain a cash-value component

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 may be 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:

1. 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.
2. 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.
3. 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.

As with all life insurance, 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.

Frequently asked questions