You may wonder why affluent and ultra-affluent individuals would need to purchase life insurance? After all, wouldn’t they have the necessary assets to fund their final expenses and provide for their heirs regardless of an unfortunate event? Wealthy people buy cash value life insurance so they can utilize it for its living benefits. Life insurance purchased by wealthy people and businesses is often used as a vehicle for providing liquidity, reducing financial liabilities, and reducing their tax profile.
Loans and Life Insurance
A frequent practice for affluent individuals is to secure loans against their life insurance. These loans are Tax-Free and can be used to fund lifestyle costs, ongoing business practices, and even new business activities. Considering the likelihood of multiple interest rate hikes by the Federal Reserve, access to a life insurance policy loan would be beneficial, as it would have far more advantageous terms than a loan from a bank. We can also envision certain assets appreciating in value if the economy grows. Having the liquidity from a life insurance loan to pay increased expenditures, such as taxes on assets, would also be desirable. It can preserve cash-flow for a wealthy individual or business, leaving said cash-flow virtually unchanged.
Minimizing Inflation Effects
Another use for life insurance in light of recent economic events is minimizing the effects of rising Inflation. If the value of the U.S. dollar declines in relation to another nation’s currency, it becomes expensive to borrow from foreign exchange markets. Having a reserve of liquidity could fill a void that a business or person sees in their financial liabilities. It’s a sophisticated, but at times necessary, form of portfolio diversification. Similar techniques can be used to cover losses one incurs during a stock market downturn, allowing a person or company to wait for a rebound.
Liquidity to Pay Estate Taxes
A time tested use of life insurance for wealthy families has been to provide liquidity to pay estate taxes. While the estate tax exemption currently stands at a historic high of $11.4 million per individual ( $22.8 million for married couples) many people are unaware that it will “sunset” in 2026, reverting to its previous exemption of $5 million per individual. The Biden administration has been feverishly trying to pass bills which would reduce the exemption much sooner than 2026, potentially affecting those with estates over $5 Million much sooner.
Ultimately, life insurance is about much more than just the death benefit. A thoughtful financial or estate plan should be comprised of some amount of permanent life insurance, as it is a multi faceted tool that should be part of any discerning persons or business’s portfolio.
With so many plans life insurance plans to choose from we can help choose one that best meets your needs. Give us a call at 248-362-1313 or fill the form below.
