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life insurance for wealthy individuals

Do Upper Class People Require Life Insurance?

It is common to assume that you should only purchase life insurance if you think that the loss of a person would create financial hardship in the family. Most commonly, people attain insurance for bigger investments such as homes and cars, however, items like phones are easier to replace, so many people do not buy insurance for it.

This principle can be demonstrated in life insurance also. Only the people in the family who’s loss could prevent great financial hardship, such as the main breadwinner, should get life insurance.

That being said, it is easy to think that wealthy people would be wasting money on life insurance due their loss would not cause financial hardship and difficulties.

Financial advisers, who specialize in estate planning, say there many ways life insurance can be of value, potentially even necessary in some scenarios, consider these:

Scenario One

If you are rich in assets, this may mean you have most of your money tied up in property or stock, these may be hard to sell quickly in case of an emergency. High net-worth individuals are required to pay capital gains tax, meaning the government owns a large proportion on your estate.
Generally, it is expected that half of your estate will go toward federal and state taxes. The government allows only nine months to pay the huge tax bill, which may require forced liquidation of your assets below market value.

By having a life insurance policy, it could provide the necessary liquidity to pay your estate’s taxes. This allows an individual to avoid the need to maintain large cash reserves or for his or her heirs to auction off property, car, or business to settle large estate taxes.

Scenario Two

Have you ever considered a whole life insurance policy? The purpose of them is to offer cash value which increases as you pay your insurance premiums. For the most part, financial advisors, warn against whole life insurance policies, this is because of their high fees and other tax shelter funds (e.g: 401ks, IRAs, etc) which usually provide a greater return on investment.

However, if you are wealthy, you are probably already paying the maximum in tax-sheltered contributions. By purchasing whole life insurance, it gives you an extra asset class for your investment portfolio, offering a reliable, low-risk, tax-sheltered growth. Often many policies will even offer a minimum growth rate which could provide a generous return.

Overall

Should upper-class people get life insurance? It all depends on how you determine a wealthy person and how the person’s assets are structured and distributed. If their net-worth is in the region of $5 million (the federal estate tax exemption) and they don’t have significant liabilities, then it is probably okay to skip the life insurance.

However, if you are very wealthy, and you want to maximize the money that can be transferred to your heirs to spare them the stress of raising funds to pay for taxes, life insurance is a valuable estate-planning tool.