Unlike liability insurance, condo insurance, auto insurance or even home insurance, life insurance is one of those coverages that everyone needs; and that advice doesn’t just come from some insurance company. Highly respected financial advisors and organizations offer the same guidance. But as a high net worth individual, you may not think that this life insurance policy rule of thumb applies to you. With plenty of capital and liquid assets available – whether in a high-interest bank account or placed in a trust fund – those unused funds can easily go toward various cost considerations you may have now or in the future.
Or so the thinking goes.
In reality, high net worth individuals need life insurance every bit as much as those who are in a lower tax or wealth bracket. There are a host of reasons why, but before we get into those, it’s important to establish the definition of an affluent individual as well as the unique risks that they often face.
What standard qualifies someone as a high net worth individual?
In some ways, the definition of a high net worth individual is akin to success, junk or beauty; it’s in the eye of the beholder. While a six-figure salary may be more than enough to live quite comfortably for someone who is single, that amount doesn’t spend quite as much for a family of four or more, even though it may technically put them in the category of “mass affluent.”
That being said, affluent individuals are generally classified into one of the following categories:
- High net worth: Liquid assets totaling between $1 million and $5 million.
- Very high net worth: Liquid assets of between $5 million and $30 million.
- Ultra high net worth: Liquid assets that are more than $30 million.
Thanks to a strong economy —and in spite of the headwinds caused by COVID-19 — all of these categories experienced growth in 2020. According to the most recent figures available from the Spectrum Group, there are now 11.6 million high net worth households in the United States (up 5% from 11 million in 2019), 1.8 million very high net worth households (up 21% from 324,000 in 2019) and 214,000 ultra high net worth households (up more than 9% from 196,000 in 2019).
These figures are worth noting because as affluent individuals enter higher income brackets – as so many did in 2020, perhaps yourself included – their insurance needs become that much more important to address.
Here are a few reasons why:
May reduce tax burden
Everyone may pay taxes, but no one is taxed to quite the same degree as high net worth individuals. According to the Tax Foundation and its analysis of IRS data, the top 1% of income earners in the country pay approximately 40% of all federal income taxes, even though they account for less than 21% of all the income earned. In 2001, the share that the top 1% paid was 33%.
When including all the other taxes (e.g. sales taxes, estate taxes, state income taxes, etc.), more than half of their income may be going to taxes. Thus, any tax advantage is worthwhile. Life insurance can ease the tax burden of a high net worth individual and their beneficiaries. As noted by Bankrate, since the federal government does not tax the beneficiaries of life insurance policies as earned income, that’s more money that can wind up going to them than it would if it was taxed. The federal estate tax threshold has been rising fairly consistently over the years; it’s currently north of $12 million, according to the IRS, up from $11.7 million in 2021 and $11.5 million in 2020 and $11.4 million in 2019.
However, should the threshold go down, life insurance offers sufficient cover.
Provide protection for unpaid medical expenses
Unlike the federal estate tax threshold, which can diminish if the government deems it appropriate, one thing that seems to never go down is the cost of medical treatment. It’s been on a perpetual climb since the statistic was first tracked. According to the American Medical Association, health care spending rises an average of 4% each year, with most of that spending going toward physician services (14.9%) and hospital care (31.4%).
Health insurance lowers the cost, but premiums follow a similar path, up 4% in 2021 for the typical family, according to the Kaiser Family Foundation.
It’s an unsustainable model – even for the ultra wealthy. And since there are many conditions that are only partially covered by health insurance, unpaid medical expenses will be the responsibility of your heirs to cover in the event of your passing. A high-value life insurance policy protects you – and, more importantly, them from this financial risk.
Fail safe measure in the event of sudden economic hardship
Life is filled with unexpected surprises, many of them economic in nature. While you may be in a great position at the moment financially, you never know when things will take a turn for the worse, deriving from an investment gone bad, a stock market crash or even identity theft.
Life insurance serves as a fall back by protecting assets and securing your family’s future. And since many policies have a cash value component to them, you can use life insurance coverage while you’re alive if you really need to.
Flush with assets, high net worth insurance may not seem like something you need when there are other expenses to consider for your high net worth family. But the fact that you have so many expenses is what makes high net worth insurance a worthwhile investment. For more information on life insurance or if you’re looking to cover the cost of premiums without having to divert resources or liquidate assets, reach out to Global Financial Distributors. We can set you up with a premium financing arrangement customized for a high net worth individual like yourself. Contact us today. If you’re a life insurance agent or wealth management professional, check out this article that may answer some of your questions about life insurance premium financing.