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Do wealthy people buy life insurance?

Photo by Jeremy Doorten from FreeImages

The following is my answer to a Quora question: “Do wealthy people buy life insurance?”

Wealthy people buy the most life insurance. It is an irony of sorts that the people who really need life insurance underinvest in it, whereas the people who might have a lesser need overinvest. People of a higher socioeconomic strata have benefited from better financial education. As such, they understand the need to indemnify themselves against loss. They have more to lose.

The difference between the life insurance portfolio of the mass affluent, the high net worth and the ultra-high net worth, beyond the value of their policy portfolio, is in how they structure it. For example, a professional buys life insurance coverage for himself and family, against death, disability and critical illness. He owns the policy no matter who the insured is.

A HNW or UHNW individual has the benefit of a personal tax accountant, personal banker and personal financial advisor. He would likely assign the policy to a company or revocable trust. He is also likely to view insurance policies as another class of financial instruments, and treat them accordingly. For example, he could buy a large single premium life policy that allows him to pay a percentage of that large single premium, and have premium financing arranged that is lower than bank lending rate for a normal loan. This maintains his liquidity, but creates an immediate estate.

That policy is considered fully paid up, and he can take a credit line of up to 105% from his bank with that policy as a collateral. In some circumstances, it can be done up to four times. This means that a possible down payment of less than $20,000 has created a cash flow of several million since it is the size of the policy, not the premium that is the factor.

Insurance also plays a significant role in business succession planning. When a director or executive dies or is disabled, or stricken by terminal illness, creditors may not have as much confidence in the company. They can call back the loan, or refinance it at a higher risk rating. This affects cash flow and leverage. Also, should a major shareholder pass away, his shares revert to his estate or trust. The existing shareholders should have the option of buying out their erstwhile partner without severely crippling the cash flow of the business. In such a case, they use term plans, assigned to the company, with a legal agreement to pay out a certain percentage to the estate of the deceased or first option on the shareholdings. These policies are then put on the books as a benefit to the director in question to mitigate personal income tax.

Insurance policies, managed well, are still the easiest and cheapest way to create an immediate estate. They have many uses, and there are policy types to cover every contingency if you have the money for the premiums.

Terence Kenneth John Nunis

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