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is compelling: Any increase (gain) in the cash value of a policy is tax deferred (i.e., not subject to tax until withdrawn); death benefits payable under a policy are received free of federal income tax by the beneficiary; and, if properly structured, death benefits can be received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.
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.
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.
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