Do High Net Worth Need More Insurance?

Many affluent Americans prefer to “self insure” rather than take out life insurance policies, according to Millionaire Corner research that indicates high net worth investors may be missing out on potential tax advantages and estate planning benefits.

A significant share of high net worth investors forego life insurance altogether, while the majority hold policies with relatively low face values, according to the results of fourth quarter study on financial product ownership among investors with a net worth of $5million to $25 million, not including primary residence.

More than 30 percent of the high net worth chose not to invest in life insurance, while 43 percent own life insurance policies with a face value of $500,000 and 11 percent, between $500,000 and $1 million, according to our research. The median income for this wealth segment was $305,000 in 2010. The income comes from three main sources, salary, investments and retirement.

By traditional standards, this group is under insured. Laurie Adams, of the National Association of Insurance and Financial Advisors, or NAIFA, tells us that a household should have life insurance policy that would cover seven to 10 times annual income. These formulas don’t always apply to the high net worth, who have sufficient investment and retirement income, and assets to maintain a comfortable standard of living upon the death of a head of household. 

While providing for surviving family members and paying estate taxes are the primary reasons Americans purchase life insurance, the policies can also offer tax advantages for investors with sizeable estates.  The American Council of Life Insurers, or ACLI, explains that certain policies allow for tax-sheltered investment gains and yield death benefits that are exempt from federal income taxes – though still considered be part of a taxable estate.

To avoid paying federal estate taxes on life insurance benefits, high net worth investors can transfer their policies to a trust known as an Irrevocable Life Insurance Trust, or ILIT. The estate planning tools allows policyholders to remove the policy from their taxable estates by transferring ownership to the trust for the benefit of a surviving spouse, children or other beneficiary. Contributions to the trust can qualify for the annual gift tax exclusion.