Life insurance for high net worth applicants

Do high-net-worth individuals need life insurance?

High-net-worth individuals benefit from having life insurance despite their substantial assets. Life insurance plays a crucial role in estate planning by providing a tax-free death benefit that can cover estate taxes. It also serves as a financial safety net, offering stability and protecting the long-term financial security of loved ones. Ultimately, life insurance provides peace of mind and safeguards the legacy and financial well-being of high-net-worth individuals and their families against some of the many risks that they need to consider, including the following:

Economic downturns: High-net-worth individuals may experience significant financial strain from economic and financial market downturns. If you have dependents as an HNWI, purchasing life insurance may give you peace of mind that your family or dependents may be financially protected from a volatile economic environment.

Estate taxes: Another reason high-net-worth individuals might consider life insurance may be to help pay for estate taxes. Estate taxes are taxes on a person’s assets after death if their assets exceed a certain threshold. The estate tax rate can reach up to 40 percent on the federal level for assets over $12.92 million, while state tax percentages and exemptions vary.

Business protection: If you are a business owner or co-owner, life insurance may protect your assets through a buy-sell agreement. This type of legal agreement stipulates terms for the buying or selling of a business interest in the event of the death, disability or retirement of one owner. There are two common types. With a cross-purchase agreement, the owners take out life insurance policies on each other, the proceeds of which will fund the business purchase if one dies. An entity agreement, meanwhile, is used by larger companies, where the business entity itself redeems the interest of a deceased owner.

Life insurance may also make sense for family businesses when undertaking succession planning. If a key family member and co-owner dies, the policy may provide the necessary funds to help the family maintain ownership and continuity. The policy's proceeds can also help cover estate taxes and provide income for surviving family members.

Life insurance strategies if you have a high net worth

Life insurance is a multifaceted tool for comprehensive financial planning. It can be useful in many situations such as providing tax-free funds to loved ones or business continuation.

Life insurance for business owners

It can be used as a form of business protection by securing key person insurance, which provides vital coverage in the event of the death of a crucial employee or executive. This policy ensures financial stability for the company by providing funds to cover lost revenue, recruitment costs or debt repayment. Additionally, implementing buy-sell agreements in life insurance can facilitate the transfer of business ownership upon the death of a partner, preventing disputes and ensuring business continuity. Succession planning is enhanced through life insurance, as it provides liquidity to facilitate the distribution of business assets among beneficiaries or to fund estate taxes, which can prevent a forced sale of the business.

Life insurance for estate planning

Life insurance can also be used to mitigate estate taxes and equalize inheritance among beneficiaries. The death benefit from life insurance policies can be used to cover estate taxes, preserving the value of the estate for the next of kin. Life insurance policies can also equalize inheritance among beneficiaries by providing additional funds to beneficiaries who may receive less from other assets in the estate. Utilizing irrevocable life insurance trusts (ILITs) allows high-net-worth individuals to remove life insurance proceeds from their taxable estate, maximizing the wealth transfer to beneficiaries.

Life insurance for retirement planning

Permanent life insurance can be a useful tool for supplementing retirement income. By accumulating cash value over time, permanent life insurance policies provide a source of tax-deferred growth that can be accessed through policy loans or withdrawals during retirement years. This supplemental income can complement other retirement savings vehicles, providing financial security and peace of mind during retirement.

Life insurance for charitable giving

High-net-worth individuals can leverage life insurance for charitable giving while receiving tax benefits. By naming a charitable organization as the beneficiary of a life insurance policy, individuals can make a donation upon their death while potentially reducing their taxable income. Premiums paid for life insurance policies designated for charitable purposes may also be tax-deductible.

Types of life insurance for high-net-worth applicants

Life insurance may be beneficial to high-net-worth individuals for a few key reasons, depending on their circumstances and financial plans for the future. However, there are a few types of life insurance policies that HNWIs may consider, depending on their needs and financial goals.

Term life insurance

Term life insurance offers coverage for a designated period, typically ranging from 10 to 30 years. In the event that you pass away during the term, your beneficiaries receive the death benefit, subject to policy conditions. If you outlive the term, the policy expires, and no death benefit is paid out unless you renew the term, if it’s an option. Additionally, some term policies offer the option to convert to whole life insurance at the term's end, providing continued coverage as long as you convert by the deadline set by your insurance provider.

 High net-worth individuals may want to consider term life insurance if they:

• Have substantial debts that their dependents would struggle to repay without their income, such as a considerable mortgage, jointly-owned properties with outstanding loans, or a business with debts.
• Have children who may need supplementary financial assistance until they reach adulthood, including college tuition.
• Require financial protection for a specific period of time, such as covering the period until retirement or until their business stabilizes.
• Want to protect against income loss due to the premature death of a key employee in their business.
• Have a significant investment in a business partnership and need coverage to facilitate a smooth transition of ownership in the event of their death.

Permanent life insurance

Permanent life insurance provides coverage for your entire lifetime as long as you pay the premiums. Whole life insurance and universal life insurance are the most common types of permanent life insurance, each with its own pros and cons. While generally much pricier than term insurance, permanent policies offer unique advantages, like a cash value component, that you can’t get with term life insurance. 

Although life insurance is not technically a financial investment, HNWIs may include a life insurance policy as an additional part of their overall financial strategy, along with primary investments such as IRAs, hedge funds or other vehicles. Life insurance can be a tax-efficient tool for wealth transfer, helping to ensure that assets are passed on to beneficiaries without large financial burdens. Also, the cash value of a policy provides a high level of liquidity that the policyholder can access if needed.

HNWIs may want to consider permanent life insurance if they:

• Want the option to borrow against their life insurance policy.
• Value the assurance that their life insurance coverage remains in force for life, contingent upon policy conditions being met.
• Are comfortable with paying elevated life insurance premiums in exchange for accumulating cash value, lifelong coverage and potential dividend earnings.
• Want to provide liquidity to cover estate taxes and ensure seamless wealth transfer.
• Have charitable intentions and want to leave a significant benefit to their chosen causes.

Applying for life insurance as a high-net-worth applicant

If you're a high-net-worth individual, finding the right life insurance company hinges on your policy needs and personal preferences. Begin by obtaining and comparing life insurance quotes tailored to your desired policy type — a useful starting point. You can utilize a life insurance calculator to gauge the appropriate coverage amount. However, note that given the larger policy sizes involved, the financial and medical underwriting process may be more extensive. Here are additional steps you may encounter during the application process:

1. Consider your medical history: Insurers typically scrutinize medical history and may require a thorough medical exam as part of the underwriting process. Serious medical complications or a family history of health issues can impact your eligibility and rates. You can expect this process to be more extensive the bigger the policy is.
2. Choose your policy type: Decide between term, permanent life insurance or some of both. Consulting with a financial planner or licensed insurance agent can offer insights tailored to your circumstances.
3. Designate beneficiaries: Select primary and secondary beneficiaries to receive the death benefit. For business-related beneficiaries, seek guidance from a financial advisor or licensed insurance agent.

In the event of your passing, beneficiaries must claim the death benefit by providing a death certificate. Depending on the payout method chosen — whether lump sum, annuity or periodic payments — beneficiaries may receive the funds after a brief waiting period.

High-net-worth life insurance can be a vital part of your financial portfolio. As significant wealth can require complex planning, consider working with a certified financial planner or estate planning attorney.

Frequently asked questions