The term ‘High net worth’ might evoke different images to different people. In terms of the average American household, high net worth (HNW) might be interpreted as someone who has many millions of dollars sitting in the bank. To wealthier individuals, the phrase might only apply to individuals in the upper 1% of the population, or those with hundreds of millions worth of assets. Yet when it comes to utilizing life insurance as an instrument to actually generate more wealth and ensure one’s legacy, the general rule is that the more wealth you have accumulated, the more challenging the financial planning becomes.
The following article will attempt to address the realities of estate planning as it applies to ‘high net worth’ individuals. We’ll touch on some common problems and explore some creative solutions, and hopefully, provide a window through which HNW individuals can visualize future strategies to ensure financial success for their households long after they are gone.
In contrast to popular opinion, each and every household should explore estate planning-not only HNW individuals. However, this article seeks to address strategies for this niche population for the simple fact that the potential risk for these families increases exponentially as their wealth increases. I also wish to emphasize that the following are actual strategies that we recommend to many of our HNW clients. No matter what your financial situation, feel free to give us a call if you are exploring life insurance or legacy planning, or for any other financial services that we provide.
Life Insurance: Our 7 Key Strategies for High Net Worth Individuals
1. Your Tool for Liquidity and Leverage
Two major potential benefits of utilizing life-insurance are to ensure liquidity and financial leverage. This is due to the fact that the actual cash value of the policy can be accessed with very easily. In addition, when we examine the liquid death benefits, we can see that this instrument will generally be available quickly, so that the trustee of the estate or beneficiary can obtain these assets promptly, ensuring that no one has to sell off any assets to create liquidity or hard-cash.
2. Use it to Pay Your Estate Tax
To put it simply, it is absolutely vital for HNW individuals to make sure that their estates possess enough liquidity to address the myriad costs that will invariably arise as their legacy is settled. These can include paying debts, buying out the business, and most frequently paying remaining state or federal estate taxes. These taxes must be planned for, especially in HNW situations where the value exceeds the permitted exemption amounts. Furthermore, these taxes must be paid within nine months of the estate holder’s demise. This tax is no laughing matter and rings-in at around 40%. Ouch! This is another excellent use for a life insurance policy.
3. Life Insurance Can Fund Your Business Continuity
Here we come back to buyouts. Often, HNW individuals will seek to ensure the continuity of their closely held businesses by converting life insurance into enough liquidity to enable family members to maintain control or actually purchase the company.
In most cases, a simple buy-sell agreement can be funded by the insurance policy, and can readily be utilized for this purpose. In other instances death benefit proceeds can be converted into quick cash, allowing family members the chance to maintain a stake or majority in the business.
4. Use Gifting to Fund Insurance Premiums
The term ‘Qualified gifting’ connotes giving a specific amount to your beneficiaries without incurring the dreaded federal gift tax. This tax resembles the estate tax in certain ways, most notably in that there is a lifetime exemption figure. One notable development in this area is that the exemption amount per each beneficiary recently increased to $15,000.
This is important as HNW individuals can legally gift funds to individuals, and in turn, these funds can be used to pay the life insurance premiums.
5. Irrevocable Life Insurance Trusts
The primary method for utilizing gifting to fund life insurance premiums is to have the funds transferred into an irrevocable trust. That trust can then, in turn, be used to purchase or pay the insurance premiums. In fact, these sorts of trusts have become so popular in recent years that they have been bestowed their own moniker: Irrevocable Life Insurance Trusts or ILITs.
In high net worth households, another popular strategy for funding an ILIT is to utilize a ‘second to die’ life insurance policy. It is particulary vital in cases where there is a surviving spouse who will have no personal need for those death benefits. ILITs have become extremely popular among HNW households and can provide the estate with much-needed liquidity and flexibility, thereby ensuring the ultimate security of your legacy.
6. Get Someone Else To Pay for It
If we are to consider the situation of so-called Ultra-high net worth individuals, we must find the ‘Premium Financing’ option. The concept of premium life insurance financing can be summarized by asking: Why should I purchase life insurance myself when I can get someone else to buy it for me? This method can ultimately increase your rate of return. This strategy is typically reserved for the very highest net worth individuals due to the enormous approval hurdles as well as the general cash value of the policy.
7. Covering Yourself in Case of Long-Term Care
Some individuals may take the extra precaution of purchasing various long-term care life insurance combination policies or ‘hybrid policies.’ These types of policies provide death benefit coverage as well as added coverage in scenarios where long-term care may be required. The advantage of such policies is that you can obtain both types of benefits in one policy, thereby simplifying the entire policy for surviving spouses or other relatives.
A great deal can be written about the secrets of the wealthy when it comes to handling their life insurance. Here I have attempted to limit the article only to estate planning. Now that we’ve delved into these, it might be helpful to review some of our other articles on life insurance, and additional strategies for wealth accumulation.
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