Whole life insurance coverage isn't for everyone, but it may be appropriate in certain circ*mstances.
Whole life insurance is a type of life insurance coverage that most people do not need. It's much more expensive than a term life insurance policy, as a term policy remains in effect only for a set period. A permanent or whole life policy is intended to remain in effect indefinitely.
Most people don't need life insurance forever, as their dependents eventually stop relying on them to earn income. In that case, paying extra premiums to keep coverage active for a person's whole life doesn't typically make sense.
However, there is a possible exception to this general rule. People who are wealthy may want to buy a whole life policy. Here's why.
This is the benefit of a whole life policy for wealthy Americans
For many rich people, it makes sense to purchase whole life insurance, because this kind of policy can provide a death benefit to loved ones that is generally tax free. And this money can be used to pay estate or inheritance taxes, so that other estate assets do not have to be liquidated to cover this cost.
On the federal level, there is an estate tax charged on larger estates. The estate itself pays this tax. Some states also impose their own inheritance taxes on heirs and/or estate taxes on the estate as well.
The tax bill on larger estates can often be substantial. And if there are not enough liquid assets in the estate, then it could become necessary to sell property to cover the costs.
Say, for example, a wealthy person leaves a large home to a loved one that is valued at several million dollars, alongside other transferred assets. If estate taxes or inheritance taxes have to be paid, the bill could run to hundreds of thousands of dollars. If, further, there isn't other money in the estate that could be used to pay these taxes, then surviving family members might have to sell the home (or mortgage it) to get the money to pay the taxes that are due.
A whole life policy could provide access to a source of funds that is very liquid, and that can be used just to cover required tax costs. When the insurer cuts a check for the death benefit, this money could then be used to pay the estate tax or inheritance taxes, ensuring no other assets need be sold and the estate can remain intact.
Since the need to avoid a big tax bill would most likely not ever go away for wealthy people with substantial assets, a death benefit would always be needed to cover these taxes. This means a term life policy that offers protection only for a limited number of years might not be the best choice. Permanent life insurance that's always there to pay the tax bill would be a better bet.
Is buying a whole life policy a smart idea?
There are many different estate planning techniques wealthy people can use to try to minimize taxes and keep their estate intact. Buying a whole life policy is just one of the different approaches a person could use to shield their wealth from the government.
But since it is simple and easy, and since the premiums on a whole life policy should be affordable for those with higher incomes or more assets, buying a whole life plan is worth looking into.
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FAQs
In addition to the favorable tax treatment, there are other benefits to whole life insurance. One benefit is that if an individual borrows against the cash value and dies before repaying the loan, the loan is automatically paid from the death benefits before being distributed to the beneficiaries.
Why do rich people use whole life insurance? ›
Wealthy families often face significant estate tax liabilities. Whole life insurance can help offset these taxes by providing liquidity to pay estate taxes without forcing the sale of assets. This allows the family to maintain control over their wealth and pass it on intact to their heirs.
Is whole life insurance a good way to build wealth? ›
The average annual rate of return on the cash value for whole life insurance is 1% to 3.5%, according to Quotacy. While whole life insurance offers fixed, guaranteed returns on your cash value, you may earn higher returns with other investments, such as stocks, bonds and real estate.
Why is whole life insurance usually the most expensive type of life insurance? ›
Typically, whole life insurance costs more because it serves as an investment. This investment, otherwise known as the cash value, is able to grow throughout your lifetime tax-free.
How do rich people use life insurance to avoid taxes? ›
Upon the insured's death, the death benefit paid to beneficiaries is not income taxable. Therefore, the potential rate of return on the premiums you pay can be competitive compared to taxable investments, potentially ensuring more money for the people you love and the things you care about.
Who would benefit from whole life insurance? ›
For people with long-term financial goals that include providing a death benefit for their beneficiaries, whole life insurance is worth considering.
How do rich people use cash value life insurance? ›
Cash Value Accumulation: Some life insurance policies offer the opportunity to accumulate cash value over time, which can provide a source of savings that can be used for various financial goals, such as education, a down payment on a home, or other future expenses.
Why do financial advisors push whole life insurance? ›
So, sales reps may try to push a whole life policy, which is life insurance that lasts until the policyholder's death and includes a tax-advantaged cash value savings component. Whole life coverage is more expensive, leading to more commission income for the agent.
What is the best insurance policy for generational wealth? ›
Term life insurance can help your family build generational wealth if you pass away during the contract term. Term provides the most death benefit per dollar of premiums and is a great tool for clients who need to save for additional financial goals.
What is the main disadvantage of having whole life insurance? ›
A more complex product than term life insurance. Higher premiums than term life insurance.
If you get a 20 pay policy, you'll pay premiums for the first 20 years. Your cash value will be higher than a similar traditional whole life policy in the beginning, but once the 20 years end, you'll stop contributing to the cash value and rely only on interest to keep increasing it.
What happens if you outlive your whole life insurance policy? ›
Most whole life policies endow at age 100. When a policyholder outlives the policy, the insurance company may pay the full cash value to the policyholder (which in this case equals the coverage amount) and close the policy. Others grant an extension to the policyholder who continues paying premiums until they pass.
How long does it take for whole life insurance to build cash value? ›
Cash value: In most cases, the cash value portion of a life insurance policy doesn't begin to accrue until 2-5 years have passed. Once cash value begins to build, it becomes available to you according to your policy's guidelines.
Where do the wealthy take their money? ›
Wealthy people keep their money in investments like stocks and bonds, treasury bonds, art and other non cash assets.
How do millionaires insure all their money? ›
Millionaires can insure their money by depositing funds in FDIC-insured accounts, NCUA-insured accounts, through IntraFi Network Deposits, or through cash management accounts. They may also allocate some of their cash to low-risk investments, such as Treasury securities or government bonds.
How do the wealthy trusts avoid taxes? ›
Once you put something in an irrevocable trust it legally belongs to the trust, not to you. Assets in an irrevocable trust do not contribute to the overall value of your estate which, for a particularly large estate, can shield those assets from potential estate taxes.
What type of life insurance do wealthy people buy? ›
Cash value life insurance (also called whole life insurance) is a great form of life insurance for wealthy individuals.
How much does a $1,000,000 whole life policy cost? ›
Average cost of a million-dollar term life insurance policy
| Age | Term length | Average monthly rate |
|---|
| 40 | Term length10 years | Average monthly rate$47.41 |
| 40 | Term length15 years | Average monthly rate$61.33 |
| 40 | Term length30 years | Average monthly rate$137.89 |
| 50 | Term length10 years | Average monthly rate$112.67 |
5 more rowsChubb Insurance Masterpiece
Chubb is a premium insurer that specializes in serving successful families and individuals. With over a hundred years of experience in 50+ countries around the world, Chubb is a household name among high net worth individuals.
How did the Rockefellers use life insurance? ›
The Rockefeller family has utilized whole index universal life insurance, cash value policies, and trusts to establish generational wealth. These strategies allow them to accumulate cash value, provide a death benefit, and protect and manage their assets across generations.
