Are you one of the over 12.5 million Americans who qualifies as high net worth? Whether you recently attained this wealth status, or you’ve been earning seven figures or more for a while now, you’re in a financial position that very few people achieve. The amount of money you earn in a single year is likely more than what others make in their entire lifetime, if not two lifetimes.
At the same time, though, you also have expenses that are far beyond the average of the American, from your mortgage to your car payment, flood insurance or even the premiums for your group health insurance. In a high inflationary environment – where every dollar buys less than what it did even as recently as six months ago – the additional living expense(s) that didn’t substantively affect your budget previously may now be more burdensome. For these reasons and more, high net worth insurance may be something worth considering. The following will help you get a better understanding of what high net worth insurance is all about, how it addresses your unique needs, what it pays for and how much is enough to cover the assets of high net worth families like your own.
What is high net worth insurance?
High net worth insurance refers specifically to life insurance. High net worth life insurance is similar to traditional life insurance policies. Namely, the death benefit covers end-of-life expenses, such as the costs associated with funeral arrangements, burial, cremation, outstanding bills as well as income replacement. But high net worth insurance is an insurance solution that is more comprehensive and multifaceted than what’s included with a traditional term life or whole life policy. That’s because they frequently contain value-added benefits that are relevant to the needs of a high net worth person or business owner.
Additional stream of income that may be tax free
For example, high net worth insurance policies often have a cash value component to them. With certain policies – such as whole life or universal indexed – they accrue value that serves as an additional income stream. Depending on how they’re structured, those dividends are often tax-free.
Can fund a buy-sell agreement for your business
What would happen to your business if one of the owners were to die unexpectedly? This is a worst-case scenario that no one expects will occur, but given the fragility of life, it can – and does – happen. A buy-sell agreement is an arrangement that states how a business will be divided up if one of the business owners is unable to perform his or her duties, whether due to illness or death. While there are a number of ways to fund buy-sell agreements, life insurance is one of the more effective methods. The proceeds from the death benefit are what is used, which prevents the owners from having to set aside their own personal funds or those of the business if a triggering event occurs. Other triggering events aside from death include divorce, a business owner who wants to sell their shares (i.e. leaving the business) and scenarios warranting the removal of a business owner, such as illegal activity.
Addresses financial hardships
With the stock market trading at historic highs and a notable increase in the number of households that reached high net worth territory in 2021 – rising to 12.5 million from 11.6 million in 2020, an increase of 8.1%, according to the research firm Spectrum Group – it may seem like the good times will continue to roll. But given the hyperinflationary environment, political instability in global affairs and a growing real estate bubble, the economy can take a turn for the worse at any moment, erasing a considerable portion of your net worth. Life insurance can provide high net worth individuals such as yourself with protection to manage risk.
Life insurance isn’t taxed as income for beneficiaries
As a high net worth individual or business owner, you are likely in the highest estate tax bracket, which currently is 40%. But as far as federal taxes are concerned, life insurance is not something that is considered taxable income. They may have to pay estate taxes to the state, but the IRS doesn’t tax life insurance proceeds as an income stream.
How much high net worth life insurance should you obtain?
From a management perspective, life insurance is similar to home insurance, personal insurance or even liability insurance: people often aren’t sure how much coverage they should obtain to address their unique needs. Depending on how much savings you have available, as well as your investments, you may have more flexibility with regard to coverage amount than a family on a fixed income.
For the most part, though, the same rule applies to middle-income families as it does high net worth families: multiply your annual income by 10. Thus, if you earn $5 million per year, your life insurance should be the equivalent of $50 million. However, some financial advisers recommend that their high net worth private clients obtain enough life insurance so it’s 20 times that of their annual salary. This means a $5 million salary would warrant a $100 million life insurance policy.
Here are a few things that can influence not only the type of policy you buy but how much coverage is the appropriate amount to obtain:
- Your medical history and/or health situation
- Who you establish as beneficiaries
- Your preferred billing schedule
- Personal liability concerns
- Any additional living expense(s) you expect to have in the future
Life insurance premium financing is an insurance solution that is customized for high net worth individuals such as yourself. Through this strategy, you can get a high value cash life insurance policy without having to draw from your own resources or other assets to pay for the premiums. And because there’s a cash value component to it, you can pay back the loan from the money that the policy earns over time.
For more information on how this strategy works and why it can work for you or your high net worth client, contact Global Financial Distributors today.