2min Read
September is Financial Awareness Month. With unique financial circumstances and responsibilities, high-net-worth families must take strategic steps to maintain financial security for their loved ones and the continuation of their wealth. Let’s explore how life insurance can play a pivotal role in safeguarding your family’s future.
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Protect Loved Ones and Preserve Wealth
In the event of an untimely death, life insurance can protect loved ones from financial uncertainty. Life insurance can be used to replace income, cover debts, fund your children’s education, and ensure that the family’s lifestyle is maintained. High-net-worth individuals often have complex financial portfolios, which can include businesses, real estate, and other assets that may not be easily liquidated. Life insurance provides immediate liquidity to help cover costs and maintain family wealth during challenging times. Policies can also be structured within an estate plan to incentivize responsible financial management, with proceeds disbursed over time or tied to specific milestones.
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Best Strategy for High-Net-Worth Individuals
One of the best strategies is to set up an irrevocable life insurance trust (ILIT). An ILIT removes life insurance proceeds from your estate, ensuring that the benefit is passed directly to heirs without increasing estate tax liabilities. Policies can also be designed to fund philanthropic initiatives or create generational trusts. Currently, in 2024, wealthy families can pass on over $27 million without paying any federal estate tax, but those amounts are set to sunset back to 2017 levels (with inflation adjustments) at the end of 2025.
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Tax Benefits of Life Insurance
One of the primary reasons wealthier families use life insurance in their financial planning strategy is its tax advantages. The death benefit paid to beneficiaries is generally income tax-free. Additionally, with tools like ILITs, wealthy families can minimize estate taxes, creating a more efficient wealth transfer. Certain types of permanent life insurance policies also offer tax-deferred cash value growth, allowing families to build wealth over time while deferring taxes.
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Where Does Life Insurance Fit into an Overall Financial Plan?
Life insurance should first be thought of as a protection vehicle. One that ensures your family can carry on a lifestyle, pay bills, and fund college and retirement in the event of an untimely death. Then it can be looked at for estate planning, legacy planning, and tax planning. Finally, after those things are done and adequate money is being set aside for personal goals and retirement, it can be used as an investment vehicle to build further wealth in a tax-friendly manner.
Conclusion
For high-income and high-net-worth families, life insurance is an essential element of comprehensive wealth protection and legacy planning. Wealthy families should integrate life insurance into their overall strategy by working with financial advisors, estate planning attorneys, and tax professionals to design policies that maximize their financial security and legacy. Life insurance can be used in conjunction with other wealth-building tools to ensure a well-rounded approach to protecting and growing family wealth for generations to come.