One may wonder why uber-wealthy individuals purchase life insurance. After all, wouldn’t they have the necessary assets to fund their final costs and provide for their heirs regardless of an unfortunate event? The truth is that they do it so they can use it for its living benefits.
Life insurance purchased by wealthy individuals and businesses is often used as a vehicle for providing liquidity, increasing financial health, reducing financial liabilities, and reducing one’s tax profile.
A common practice for wealthy individuals is to secure loans against their life insurance. These loans are not taxable and can be used to support a lifestyle, ongoing business practices, and even new business activities. Considering the likelihood of an interest rate increase by the Federal Reserve, access to a life insurance policy loan would be valuable, as it would have far more favorable terms than a loan from a bank. One can also imagine certain assets appreciating in value if the economy continues growing.
Having the liquidity from a life insurance loan to pay increased expenditures, such as taxes on said assets, would also be desirable. It would preserve cash-flow for a wealthy individual or business, leaving said cash-flow virtually unchanged.
One of the most significant purchasers of life insurance is banks. Bank owned life insurance (BOLI) is when banks purchase policies on their executives and key employees. It’s an excellent vehicle for banks, as it works as a tax-shelter and as a source of tax-free funds. It also provides a low level of risk helping to diversify their investment profile.
Ultimately, BOLI is a strong choice for banks who want to be tax efficient, have a diversified portfolio, and want access to liquidity to survive more turbulent times. A carefully designed life insurance policy can do this for individuals for only pennies on the dollar.
Another use for life insurance in light of recent economic events is covering for devaluation of the U.S. dollar. If the value of the U.S. dollar declines in relation to another nation’s currency, it becomes expensive to borrow from foreign exchange markets.
Having a reserve of liquidity could fill in for any gaps that a company or person sees in their financial liabilities, at home and abroad. It’s a much more complicated, but at times necessary, form of building a portfolio.
Similar techniques can be used to cover losses one incurs during a stock market dip, allowing a person or company to wait for a rebound. These techniques can be achieved with a top-notch team of financial advisors, tax lawyers, and insurance advisors.
A particular use of life insurance that has been affected by the recent tax bill is providing liquidity for the estate tax. While the estate tax exemption has doubled under the new law, many people do not know that it will "sunset" in 2026. A "sunset" means it will revert to its previous exemption of $5.49 million.
So anyone preparing for an estate planning event — we all hope would be more than eight years from now — needs to take that into consideration. Additionally, there have been tax bills in the past that were reverted nearly immediately after a different party was in control of the government.
Ultimately, life insurance is about much more than just the death benefit. Any thorough financial or estate plan should be comprised of some life insurance, as it’s a versatile tool that should be part of any discerning person or business’s portfolio.
Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.
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