3 Reasons To Re-Evaluate Your Life Insurance Once Your Net Worth Reaches $1 Million
You’re set to retire comfortably and pass on generational wealth to your children when you die. You might feel you don’t need life insurance since your burial needs are taken care of by investments or cash savings, your family’s home is paid off, and your surviving heirs can live off their inheritance.
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If you’re fortunate enough to be in this situation, you should still consider investing in life insurance, according to many experts.
“Life insurance is a key area of financial planning that serves multiple purposes. Not only can it provide an income replacement after the insured individual passes away, but it also functions as a strategic component in estate planning, especially for those with substantial assets,” said Samuel Deane, a financial planning expert for Trust & Will.
Hedge Against Market Downturns
Your other investments, no matter how conservative they might be, are subject to interest rate fluctuations and the whims of the marketplace, Deane pointed out. “Sure, investments can minimize the need for life insurance, but in many cases, they are subject to market risks and economic downturns. On the other hand, a life insurance payout is a guaranteed amount that won’t decrease due to market conditions,” he said.
Deane added that your heirs can also use life insurance to cover other losses or shortfalls, including estate taxes or outstanding debts. “Believe me, the last thing you want is for your heirs to be forced to sell assets to pay for estate taxes,” he said.
Minimize Inheritance Tax
If your total estate is greater than $13 million or so, you will want to find additional ways to minimize inheritance tax. Plus, if the increased estate tax exemption of $12.92 million sunsets, as expected, in 2025, anyone with a net worth exceeding roughly $5 million will want to protect their heirs from estate taxes.
While an Indexed Universal Life Insurance policy carries risks, since its value is tied to the stock market, it can be the right choice for some high-net worth individuals, according to Jennifer (Azar) Burnham-Grubbs, founder and CEO of Quantum Insurance Services and co-founder of Womxn of Wealth.
“A well-utilized, properly funded IUL can be an absolutely fantastic tax diversification tool,” she said. “Those with very large estates ($14M+) will further benefit from doing advanced planning with permanent life insurance since it minimizes inheritance tax and can allow wealthier families to steward legacy goals, often with a strategic charitable giving component.”
Fund Long-Term Care
Many permanent life insurance policies include a long-term care rider or an option to convert the policy to pay for LTC if needed. “That makes it an essential piece of the portfolio for anyone who has good enough health to qualify,” Burnham-Grubbs said.
Why You Shouldn’t Wait to Write a Permanent Life Insurance Policy If You Have Assets to Protect
Burnham-Grubbs also pointed out that you should consider life insurance as early in life as possible, before you are likely to need it for long-term care or death benefits.
“Insurance gets more expensive as we age and for many people becomes unaffordable by age 55,” she told GOBankingRates in an email interview. “It’s highly recommended to get advice from an expert while one is well ahead of retirement to learn how to utilize a life insurance strategy most effectively. All in all, this is one of the least understood, most complex areas of finance but well worth the learning curve if done correctly.”
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