One result of accumulating wealth may be a desire to keep it in the family by passing along assets to future generations. Life insurance is a popular way for the wealthy to maximize their after-tax estate and have more money to pass on to heirs. Life insurance can also be used as an investment tool with tax benefits when you're still alive. While life insurance isn’t something that wealthy people alone can benefit from, there are several unique reasons that someone with a higher net worth may consider purchasing it.

Tax Laws Favor Life Insurance

One reason why the wealthier may consider purchasing life insurance has to do with taxation. Life insurance death benefits are income-tax-free to your beneficiary. This could be appealing to an individual with a higher net worth who wants to provide an inheritance that doesn't create an extra tax burden. If you leave money behind in a retirement plan, like a 401(k) or Traditional Individual Retirement Account (IRA), your heirs would owe income tax for taking the money out.

In 2023, you can leave up to $12.92 million in property to your heirs. If you leave more, your heirs would owe 澳洲幸运5开奖号码历史查询:estate taxes on the inheritance. Life insurance could help cover these taxes by giving your loved ones extra cash. They wouldn't have to sell off assets, like real estate or a busines🌄s, to cover the taxes.

Life Insurance Can Protect Business Owners

If an entrepreneur co-owns a business, then life insurance can fund a buy and sell agreement in the event of a partner's sudden deat꧂h. The deceased partner's familꩲy gets a payout while the surviving partners maintain control of the business.

A family business can also benefit from a 澳洲幸运5开奖号码历史查询:key person insurance policy. This is insurance on the main person in a small business—usually the owner, founder, or key employees. A keyman policy protects the firm from going under in the event that key personnel passes away before a replacement is in place. The bu🌠siness itself serves as the beneficiary and is able to use the proceeds for things like hiring and training replacement employees, paying off outstanding business debts, or keeping up with day-to-day operating expenses.

Life Insurance as an Investment

Life insurance is more than a death benefit. Permanent life insurance policies that last your entire life can build cash value. This is money you can withdraw or borrow wওhile alive. The policy also grows your cash value over time.

For example, 澳洲幸运5开奖号码历史查询:whole life insurance can offer a fixed return with steady 澳洲幸运5开奖号码历史查询:tax-free dividends. This means that your policy can provide an additional stream of income if necessary. You could also use a 澳洲幸运5开奖号码历史查询:variable life insurance policy to invest in mutual funds while keeping the🤡 tax benefits of life insurance.

The cash value in the policy builds up and can be borrowed to pay for college expenses or other costs during your lifetime. You do not owe income tax while the cash value stays in your policy. If you take the money out through a loan, you do not owe income tax for taking out your gains. If you decide one day that the insurance is no longer needed, it can be sold as a 澳洲幸运5开奖号码历史查询:life settlement.

Each of these benefits may appeal to individuals with a high🌃 net worth or to anyo𓆉ne seeking to use life insurance as an investment tool.

Life Insurance Strategies

There are a variety of insurance scenarios to choose from. The right one may depend on things like your current income needs, your tax situation, and other assets that 😼you’re using to fund your financial goals. Here are three example scenarios of how life insurance can be used as part of a broader wealth management plan.

Retirement Plan Funds Life Insurance Strategy

Retirement plans such as individual retirement accounts and 401(k)s limit how much you can save per y🐎ear. You could also use life insurance cash value after maxing out your other retirement plans. You could save more through life insurance with tax benefits versus using a regular brokerage🔯 or savings account where you owe taxes every year.

Your heirs also owe income tax when inheriting retirement accounts, but not with a life insurance death benefit. Assume James has $900,000 in his IRA. To avoid losing a large percentage of his IRA to Uncle Sam upon his death, James buys a second-to-die insurance policy with his $900,000. Upon James’ death, his wife receives the $3 million income-tax-free benefit.

Transfer Current Life Insurance With Cash Surrender Value Policy to Increase Death Ben🌸efit

If you already have life insurance with cash value, consider whether you still need the money for yo❀urself. If not, you could exchange the policy to another with a larger death benefit to create a larger inheritance.

Kevin had a 10-year-old second-to-die insurance policy worth $850,000, with a death benefit of $1.53 million. His advisor recommended that 🅘he do a tax-free insurance policy๊ exchange. The new policy had an increased death benefit of $3.48 million, and there were no out-of-pocket charges.

The Two-Step Annuity Tactic

An annuity turns your contributions into 澳洲幸运5开奖号码历史查询:future income payments. You can guarantee these payments to last for your entire life. You could set up ﷺan annuity for a one-time purchase and use that income to pay for a life insurance policy, creating a larger🦩 inheritance for your heirs.

Sarah buys an immediate joint-life annuity for $1 million, which pays $43,843 annually as long as Sarah and her husband are alive. Next, Sarah uses the annual $43,843 payout to fund a $5.68 million second-to-die policy. In essence, Sarah converted $600,000, the after-tax value of the initial $1 million, into $5.68 million. Finally, both𝐆 the annuity and death benefits are gua🐼ranteed.

Is Life Insurance Only for the Wealthy?

No, life insurance is not only for the wealthy. If anyone would suffer financially from your death, you may need to have life insuran𓆏ce, regardless of net worth. This includes if:

• Are married or have one or more children
• Are the primary source of income for your household
• Have a special-needs dependent
• Owe co-signed debts, including student loans, a car loan, or a mortgage
• Want to leave behind money to pay funeral or burial expenses

Those are all reasons to consider purchasing life insurance if you’re interested in creating a measure of financial security for anyone whom you’ll leave behind. The good news is that life insurance may be cheaper and easier to purchase than you mig🌳ht think. For eꦆxample, there are a number of companies that offer term life insurance online with affordable premiums, based on age and overall health.

Permanent life insurance that builds cash value and lasts your entire life is much more expensive. These ꧅policies tend to be a better fit for the wealthy who have covered their other financial needs and have extra money to spend on investing and creating an inheritance.

The Bottom Line

Life insurance can offer numerous benefits, regardless of net worth or wealth accumulation. When weighing life insurance options, consider what your primary reasons are for purchasing coverage, how much coverage you expect to need, and whether you prefer term life insurance or permanent life. Researching the best life insurance companies and getting quotes for coverage online can help you choose the right policy to meet your needs 🅠and financial situat🌟ion.

Correction—Oct. 26, 2022: This article was corrected from a previous version that stated passing away "without" outstanding loans from a life insurance policy results in the loan amount being deducted from the death benefit. The "without" was a typographical error, and the "-out" has been removed.