The definition of “wealth” is quite broad. In the context of this article, I will define a High Net Worth Individual (“HNWI”) as a person who has net worth of at least $15,000,000 and liquid assets in excess of $5,000,000. At this level of wealth, a HNWI is primarily concerned with preserving wealth from estate and income tax drag, and would only purchase life insurance if it is considered a good investment compared to other investment alternatives.
From an estate tax planning perspective, the planning for a HNWI is often very complex and requires that the HNWI give up some control of a portion of his or her wealth in order to reduce state and federal estate taxes. The complexity and loss of control, is not something that a HNWI is generally always comfortable with. At some point in time, the loss of control, coupled with the complexity issues, becomes too burdensome and unpalatable. If that is the case, estate taxes and income taxes are an investment decision consideration. From an income and estate tax perspective, the government and the state are, in realty, undesirable beneficiaries of a portion of accumulated wealth. Since life insurance proceeds, if properly structured, are income and estate tax free, the comparison of life insurance to other investment opportunities must be considered on an after-tax (income and estate taxes) basis. This comparison depends on the risk/reward tolerance of the HNWI and the corresponding risk/reward alternative.
For example: (a) if the insurance comparison is to stock market returns, then a variable life insurance product is the appropriate comparison; (b) if the insurance comparison is to an index like the S&P 500, then an indexed universal life insurance product is the appropriate comparison, and (c) if the insurance comparison is to a bond return, then a universal life insurance product is the appropriate comparison.
A properly-structured insurance portfolio is a very efficient and effective addition to any wealth transfer plan since it may, in addition to its tax and liquidity advantages, provide for creditor protection diversification, stability, estate equalization, and, in some cases, protection against sovereign and currency risk. As a result, life insurance is a key part of their overall wealth transfer plan for many HNWI.
We, at MKA Executive Planners, are available to provide a detailed analysis that is a tailored analysis as to why life insurance may be a good choice with respect to your specific situation, goals and investment philosophy.
If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at bkoslow@mkaplanners.com or (781) 939-6050.
Securities offered through Advisory Group Equity Services, Ltd., Member FINRA/SIPC. 444 Washington Street, Woburn, MA 01801 (781) 933-6100.
This article should not be considered as providing accounting, business, financial, investment, legal, tax, or other professional advice or services. It is not a substitute for such professional advice or services, nor should it be used as the basis for any decisions or actions that may affect your business or you personally. This should only be one part of your research. You should seek authoritative guidance from a qualified accountant or attorney before taking any action.
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