Life insurance is a major component of estate planning. Life insurance is critical for high net worth individuals that wish to preserve their estate for future generations. By properly developing an estate plan and utilizing the right type of life insurance, you can insure the livelihood of your loved ones even when you’ve passed on.
Life insurance can also play a vital role for businesses as well. Business owners commonly buy life insurance on each other to mitigate risk. In the event of an untimely death of an owner, the death proceeds from their life insurance policy creates an influx of cash. This cash can be used to provide your business with working capital immediately until a suitable replacement can be found. This type of life insurance is also known as key-person life insurance. Life insurance can also be utilized in a buy-sell agreement.
A “business” can technically purchase and pay for life insurance on its owners. If a business owner passes away, the life insurance will be paid to their family settling their ownership share of the business. This allows the business to continue operating without being forced to liquidate or sell assets. This type of coverage also ensures that your spouse and/or heirs will not have to endure your business partners and vice versa.
Procrastination is human nature, but every year – even in excellent health – your rates will continue to climb as you get older. If you know you are going to need life insurance at some point in the future, you can save money by locking in a lifetime premium now, when you are young and healthy.
Quick Article Guide:
- Unconventional Life Insurance for the Affluent
- Tax Benefits of Life Insurance
- Estate Planning with Life Insurance
- Developing a Custom Estate Plan
Unconventional Life Insurance for the Affluent
Life insurance is usually purchased by breadwinners who fear their family will be unable to pay bills or maintain their lifestyle when they pass away. Many high-net worth individuals feel like they don’t need life insurance or that they are self-insured. While their families may not need replacement income to pay the bills, these individual’s families usually stand to lose the most wealth. Many high net worth individuals own large estates and property, but these assets are not liquid.
Depending on the value of your estate, your assets may need to be sold off at a discount when you pass away to settle estate taxes. If your estate is larger than the current year’s estate tax exemption, you can expect your heirs to face federal estate taxes as high as 40%, and inheritance taxes of up to 20%, depending on the state you reside in.
The IRS will collect the estate taxes due on your estate within nine months of your passing, and they must be paid in cash. If your heirs do not have access to capital to pay these taxes, they will be forced to sell your assets and your estate to raise the capital needed to settle with the IRS.
These estate sales are often referred to as “fire sales” because your heirs will be forced to sell your assets quickly, and usually for much less than their true value. If your heirs or surviving family members are unable to raise the money needed to pay the IRS before the taxes are due, they risk losing the entirety of your estate to an IRS seizure.
This is not something that you want your loved ones to endure when they are grieving your loss. If you own a business, your family may be able to fall back on it, but will your business still be able to run without your oversight? Would your business still be as profitable? Many businesses fall apart when the business owner or founder is no longer able to control the day-to-day operations of the organization.
If your spouse is forced to step in to fill your shoes, he or she may need to hire a new executive to fill your role. Hiring a new employee to keep the business going will cut into profits, reducing the amount of money your spouse has to survive on each month. In addition, your business may lose clients and relationships. If you are a CPA for example; your business may lose clients to competitors when your existing book of business learns you are no longer in the picture.
This sudden loss of income can be devastating to your loved ones and it may prevent them from being able to continue their current lifestyle. Life insurance for high-net worth individuals is extremely important to provide supplemental income to your dependents, and to reduce your estate’s tax liability, preserving your assets for future generations.
Tax Benefits of Life Insurance
The IRS released the current estate tax exemptions for the 2018 tax year. Currently any estate valued at $11,200,000, or more, is subject to a federal estate tax rate of 40%. In addition to federal taxes, your heirs or estate may be subject to inheritance taxes as high as 20% as well depending on the state that you reside in.
For some of our clients, their heirs are facing losing as much as half of the assets they have worked their whole life to acquire. If the total value of your estate and life insurance death benefit is less than $11.2 million, your estate will not be subject to estate tax. Most likely, you will not have to worry about creating a trust to reduce your estate tax obligations.
If the total value of your estate is $11.2 million or more, your life insurance policy and your estate will be subject to federal estate taxes and possibly state inheritance taxes. To avoid crippling estate taxes, tax attorneys, bankers, financial planners, and skilled life insurance agents often recommend creating a trust that will separate the value of your life insurance policy from your estate. These trusts, also referred to as irrevocable life insurance trusts, create an influx of un-taxed cash at your passing. This cash can be used by your trust to settle estate taxes with the IRS, leaving your estate and assets intact.
Estate Planning with Life Insurance
In addition to reducing or eliminating estate tax liabilities, there are other reasons many high-net worth individuals rely on estate planning with life insurance. Life insurance death benefits typically pay your beneficiary or beneficiaries a lump sum.
With an estate plan or a trust, you can assign annuitized installment payments to your children or grandchildren preventing them from spending the money you left them too quickly, and allowing it to grow.
Or if your beneficiaries are young, your trust can hold onto the assets that you want to leave them until they are older and hopefully more mature. Life insurance trusts also keep the final details of your life insurance private and out of public record. This prevents collectors from trying to come after your beneficiaries for unpaid debts and keeps prying eyes from knowing your family’s business. With a custom estate plan, your heirs will be able to enjoy the assets from your estate for generations to come.
Developing a Custom Estate Plan
High-net worth individuals have much different needs for life insurance than an average individual or family. If you heirs are facing an estate tax liability, or if you want to make sure your assets are divided amongst your heirs as you specified, you may want to look into creating your own custom estate plan.
A term life insurance policy from a call center is not likely going to provide your estate with the estate tax protection needed. We have worked with hundreds of high net worth individuals who have utilized estate planning and life insurance to insure their estate is passed on to their loved ones seamlessly when they are gone. We always recommend working with an estate or trust attorney to create an irrevocable life insurance trust.
Once your trust is set up, we can help your shop over 40 top-rated life insurance carriers to find the most equitable solution available. We offer our clients free no-pressure consultation to help them find the best options available to them.
If you’re not ready to talk right now, fill out our quote request form on the top right side of this page to get a better idea of what life insurance coverage will cost you. If you can’t find the quotes you need, the product that your searching for might not be available in your state, or it might be called something else. Give us a call and we’ll help you find you the coverage you need, toll-free: 855-247-9555.
Cliff Pendell
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