Accentuating the Positives, The Often Overlooked Advantages of Life Insurance

Kathryn Harrison, CFP®, Managing Director, First Republic Investment Management

Stocks, bonds and hedge funds typically are the focus of investment portfolios for affluent families and their advisors. Their appeal is supported by media attention, daily valuations and a drive to maximize performance. However, the benefits of life insurance—especially in an environment of rising taxes—often are overlooked. With its preferred tax treatment and variety of applications, life insurance can add value and flexibility that complements an overall portfolio.  

Life insurance generally is viewed as protection in the event of untimely death. But it also can be a solution for myriad personal and business needs. Further, the tax treatment of life insurance is compelling: Any increase (gain) in the cash value of a policy is tax deferred (i.e., not subject to tax until withdrawn); death benefits payable under a policy are received free of federal income tax by the beneficiary; and, if properly structured, death benefits can be received free from federal estate taxes as well.    

The following are some real-life examples of applications for life insurance:   

Funding Estate Taxes  
Family assets (real estate or closely held businesses) can be preserved for future generations in a cost-effective manner by funding future estate taxes with life insurance.   

Charitable Planning  
Individuals can make significantly larger donations to their chosen charity using the death benefit of a life insurance policy, either by transferring a policy to the organization or by simply naming it the beneficiary and paying premiums.   

Wealth Transfer /“Dynasty” Planning  
Life insurance policies held in trusts for children or multiple generations can help minimize income taxes on the trust’s investments and provide a fund free from creditor claims.   

Business Succession /“Key Man” Protection  
Life insurance is an ideal funding vehicle for buy/sell agreements between shareholders of closely held businesses and also protects the business from potential lost revenue due to the premature death of a key producer or executive.   

Supplemental Retirement Plan  
A properly structured life insurance policy can provide supplemental retirement income—beyond qualified plans such as 401(k) plans—through the policy’s cash value. This is possible due to the ability of a policyholder to take tax-free loans or withdrawals from the available cash value.   

Estate Equalization  
For individuals with children from multiple spouses, life Insurance can be used to provide a legacy to certain individuals while passing current assets and investments to the surviving spouse or other family members. Because life insurance death benefits are paid promptly in cash, without probate, income tax, or estate tax (if properly structured), it is a very popular tool to fund an inheritance.   

Once your needs are identified, you should consider the following as you begin to explore the acquisition of life insurance:   

  • Insist on institutional pricing and solutions tailored for the affluent. Affluent families have sophisticated wealth transfer needs. Select product solutions that acknowledge your needs, are priced to reflect the experience of the affluent buyer, and have an in-force management component designed to deliver value beyond the initial purchase.   
  • Enlist experts to maintain your insurance portfolio. Like investments, insurance portfolios need to be expertly managed over time. Because changes will take place over time—to family situations, estate and tax laws, and the economy—existing policies must be monitored constantly by experts who can analyze and adjust your policies as needed.   
  • Ensure your life insurance advisors work well with your other advisors. The financial affairs of affluent families are intricate. The best life insurance portfolio specialists appreciate the larger picture, and families are best served by specialists who add value as part of an advisory team and who can balance sometimes over­lapping goals or desires.    
  • Given how hard you’ve worked to accumulate your assets, and what’s at stake both personally and financially, life insurance should be an essential component of your planning.

Insurance services are provided through First Republic Securities Company, LLC, Member FINRA/SIPC, DBA Grand Eagle Insurance Services, LLC, CA Insurance License # 0I13184.

First Republic Private Wealth Management encompasses First Republic Investment Management (“FRIM”), First Republic Trust Company (“FRTC”), First Republic Trust Company of Delaware LLC, and First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC. FRIM is a SEC Registered Investment Advisor. This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client’s expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. This document may not be reproduced or circulated without our written authority. The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that FRIM and FRSC do not provide tax advice. The levels and bases of taxation can change. Investors’ tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document. Accordingly, you and your attorneys and accountants are ultimately responsible for determining the legal, tax and accounting consequences of any suggestions offered herein. Furthermore, all decisions regarding financial, tax and estate planning will ultimately rest with you and your legal, tax and accounting advisors. Any description pertaining to federal taxation contained herein is not intended or written to be used and cannot be used by you or any other person, for purposes of avoiding any penalties that may be imposed by the Internal Revenue Code. This disclosure is made in accordance with the rules of the Treasury Department Circular 230 governing standards of practice before the Internal Revenue Service. Products and/or services offered by First Republic Securities Company, LLC, and First Republic Investment Management are not deposits or obligations of, or insured, guaranteed or endorsed by any bank, Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency, entity or person. The purchase of securities involves investment risks including the possible loss of principal. The opinions expressed herein are solely and exclusively the opinions of the Investment Adviser Representative of the Adviser or Trust Company Officers of First Republic Trust Company, as the case may be, and are not associated with the Broker-Dealer (First Republic Securities Company, LLC). First Republic Securities Co., LLC does not offer investment advice or market commentary.