The typical assumption about life insurance is that it is purchased to provide financial support to surviving family members in the event of the policyholder’s death. But not many are aware that it is a safety net as much as it is an investment. In fact, wealthy people often tend to downplay the need for life insurance because when the family members are financially secure, it is as good as being virtually self-insured.

While the majority of wealthy individuals have a diversified portfolio of investments that would likely preserve their standard of living in the absence of life insurance, there are compelling reasons why they should reconsider.


"Wealthy individuals can take a life insurance policy to pay future estate taxes"


Taxation is one of the reasons why some wealthy people consider life insurance. Most countries offer tax benefits for life insurance premiums, providing asset protection. When a life insurance claim is paid to the beneficiary, the money is not considered taxable income, and the surviving members are often not obligated to pay taxes on it.

Furthermore, due to specific tax advantages, life insurance has been, and will continue to be, a perfect way for businesses — especially those owned by ultra-high-net-worth individuals — to pay for certain corporate benefits of employees. Additionally, wealthy individuals can take a life insurance policy to pay future estate taxes.

Asset equalization

Life insurance sum will come in handy during asset equalization, especially if the policy holder’s heirs hold different views on running the family business and distributing the wealth. Heirs can distribute the assets and use the life insurance proceeds to balance out inequalities if any. This could help preserve cordial relations between family members — which is important considering there are instances of succession leading to untoward incidents.

Additionally, some wealthy people pledge their assets to charities and non-profit organizations upon their deaths. In this case, the life insurance proceeds will help the surviving members support the cause, without having to bear the financial burden.

Life insurance as an asset

A few wealthy individuals recognize the value of life insurance from an investment standpoint. When they no longer feel the need to own a policy, they sell it through a settlement process. They can also sell it on the open market and receive a cash pay-out immediately. This option can help the policyholder in the event of a liquidity crunch.

Business protection

For business owners, life insurance can cover a buy-sell arrangement in the case of an unexpected death. For example, a “key person” policy life insurance protects the firm from going bankrupt if the co-owner dies without an apparent successor. Instead, the business becomes the beneficiary and can use the earnings to hire and train replacement employees, pay off debts, or cover day-to-day

expenses. Also, in the case of partnership insurance, when a partner dies, his/her estate can use the pay-out to acquire the deceased’s stake in the business.

Also, unexpected death may require the purchaser's estate to liquidate assets at an inconvenient time to repay leveraged loans, business expenses, and other debts, including income and estate taxes. Rather than liquidating valuable and income-generating assets, life insurance can provide the funds necessary to meet tax obligations.

"In an emergency, a life insurance policy can be a source of getting loans. It's a quick source of immediate funds because the cash surrender values are already part of the policy and immediately available"


Obtaining loans

In an emergency, a life insurance policy can be a source of getting loans. It's a quick source of immediate funds because the cash surrender values are already part of the policy and immediately available. The insurer will use the policy as the collateral for the loan. If there is no time to wait for the application to be approved, a life insurance loan can be a useful supporting tool.

Maintaining one's position in an ever-changing financial and legislative climate necessitates careful planning. There are various options available today, but the best life insurance strategy for wealthy individuals is defined by their unique financial needs and the other reasons for their purchase. For example, if you make a lot of money, you might need to find a firm that provides term life insurance with large enough death benefits to replace your income.

When considering any advanced planning strategies, it is advisable to seek the guidance of expert tax attorneys and insurance consultants. When done with professional help, these strategies can go a long way towards preserving your family's lifestyle. There are multiple examples of wealthy families facing financial ruin after the death of a senior figure. This is particularly the case in family-owned businesses. A well-strategized policy could enable the senior figure to ensure that their absence does not accompany more problems.

If you wish to know more on life insurance policy or financial planning, contact us at info@cfsgroup.com

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