Why High Earners Need Life Insurance Too: Helping Your Family and Preserving Your Finances
There are several ways high-net-worth individuals can benefit from life insurance. It is a vehicle that could provide loved ones with an income stream, it can be used as an investment strategy, it may help to lower your estate tax burden, and it could also be a potential safeguard for business owners.
Generating an income stream – Cash Value Life Insurance
You may use the cash value portion of your permanent life insurance policy as an income stream during retirement. Cash value life insurance works because a portion of each premium payment gets siphoned into a savings feature that collects interest. There are several pros and cons of cash value life insurance. These include:
Pros
- You can withdraw cash, borrow from it, or even make premium payments.
- Cash value life insurance policies don’t expire after a specified period of time.
- The funds contributed earn interest over time.
Cons
- It is more expensive than term life insurance.
- You generally don’t see a significant cash value balance in the early years of the policy.
- Your beneficiaries don’t get the cash value after you die.
- Withdrawing cash from the policy will reduce the death benefit.
Using life insurance as an investment
When it comes to investing using life insurance, each person's situation will be different, and they should research how the pros and cons of each policy might impact them. The only policies that can be used for investing purposes are permanent life insurance policies that have the cash value component. The reason for this is that they may help mitigate the risk of loss from market fluctuations. Some of the advantages and disadvantages of using life insurance as an investment, include:
Pros
- Cash value insurance investing may be more predictable than traditional investing.
- The money within the cash value grows tax deferred.
- While you are alive, you can withdraw or borrow against the funds.
Cons
- Traditional investing could potentially offer higher returns.
- Your eligibility and the cost usually depend on your age and health.
- The cash value doesn’t pass down to your heirs.
Tax benefits
High earners could benefit in a few ways from purchasing life insurance. Some of these include:
- Insurance premiums aren’t subject to estate taxes.
- Policy owners with estates of $13.61 million or less are able to leave that amount to their beneficiaries and avoid paying estate taxes for 2024.
- The death benefit is a tax-free asset that can be passed down to your beneficiaries.
Safeguard for business owners
A life insurance policy has pros and cons for business owners who take out a policy to help pad against potential financial loss. These include:
Pros
- If you have a partner and one dies, you can buy out their share with proceeds from the death benefit provision in what is called a buy-sell agreement.
- If you own a family business, life insurance may help ensure each family member gets an equal inheritance.
Cons
- The cash value can be a weak investment instrument.
- The application process can be tedious.
Consider consulting a financial professional
Life insurance policies can be complex. Consider consulting your financial professional to determine which type of policy would work for you and your financial strategy and goals, especially when creating or modifying your estate plan and including life insurance.
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