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Life insurance is great for covering debt and future expenses, but that doesn't mean people with money can't benefit from it as well.
When most people think of life insurance, they think of getting a lump sum of tax-free money that families can use to pay off debts and plan for their futures. But that doesn't mean it’s only for people who don’t already have that money and that rich people don’t need life insurance. Life insurance is for all sorts of people, and those with a high net worth can still benefit from it to leave an inheritance or donate to charity, as long as they make some special considerations along the way.
High-income earners will probably be looking for life insurance policies with a high death benefit — a million dollars or more. This can raise red flags with some carriers, who need to make sure your financial situation requires such a high benefit so you’re not over insured (and so they're sure you can pay the higher premiums that come with a bigger policy). Some insurers will have faster and more seamless processes in place, and high net worth people should look to these companies to make the application process as easy as possible.
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As mentioned, life insurance is a great way for individuals to pay off debts, plan for future expenses, and leave their loved ones in a good place financially. If you have a lot of money, you might be able to self-insure. So why buy life insurance?
First of all, “rich” is relative. Someone might be living comfortably and have enough savings to pay off a mortgage, pay for future college, and leave their spouse with a nest egg if needed. That doesn’t make them Mark Zuckerberg. And if you make a lot of money but still aren’t living within your means, you might use life insurance to pay off debts.
You may also not have the money yet for all of the things you want to do. Let’s say you have enough for all of the prudent financial planning we’ve talked about, but you’ve also dreamed of leaving a large windfall to your alma mater, your favorite charity, or a museum. The death benefit from a life insurance policy can allow you to have enough cash to fulfill all of your wishes.
Finally, being rich can, ironically, be expensive. Not many people are subject to an estate tax — it’s only applicable for estates with a taxable value of $5.45 million, and Warren Buffett said in an interview that only 5,000 people would be subject to the estate tax in 2017 — but, since death benefits are almost always exempt from tax, it can be a great way to cover the estate tax and leave your money to your family.
In the end, whether or not you buy life insurance comes down to what your financial plans are and what your family’s needs are. But it’s important to not assume that just because you’re living comfortable you don’t need life insurance.
Term life insurance is great for most people — it’s simple and affordable — but people with high net worths might consider looking into permanent life insurance policies like whole life insurance.
These policies have a cash value component that can gain value, and if you’ve already maxed out your other tax-deferred savings accounts, permanent life insurance can be another way to save. They’re also relatively protected from the stock market; while you won’t get as big of returns as other types of investments, they’re more consistent.
Keep in mind there are some downsides to permanent life insurance — it's often complicated and it’s up to five to 15 times as expensive as term life insurance — so you should talk to a licensed expert first. But while products like whole life insurance aren’t right for everyone, they may be right for certain high income earners.
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