Why The Wealthy Choose Life Insurance? Lessons From $250 Million Policy

Did you know that someone recently bought a staggering $250 million life insurance policy in Hong Kong, setting a new Guinness world record?

Before this, the highest policy value was $201 million.

You may wonder why someone who can afford to buy such a large policy would need one.

🤔 What could be the motivation behind buying a $250 million life insurance policy?

Here are my two fils on this...

Life insurance is typically perceived as a tool for financial protection against unforeseen events. However, the wealthy choose life insurance for many crucial reasons that go beyond mere protection.

Let's discuss each of them in detail.

Guaranteed Inheritance & Seamless Wealth Transfer

Once a person has amassed a certain amount of wealth, preserving it, making it last longer, and transferring it to the next generation seamlessly becomes their priority. Permanent life insurance can be an efficient tool for this objective.

•  By having one, you can ensure that your loved ones have a guaranteed inheritance, irrespective of market conditions, asset performance or business fortunes.
• By placing a life insurance policy in an Irrevocable Life Insurance Trust (ILIT), the death benefit can be excluded from the taxable estate and from creditors, further enhancing wealth transfer efficiency.
• Inheritance laws in some countries restrict or stipulate how your wealth should be distributed after death. These laws will apply, even if it contradicts your personal wishes. However, with life insurance, you have the flexibility to directly nominate beneficiaries of your choice, ensuring that they receive their intended share of your legacy, regardless of legal constraints.

Tax Efficiency

High-net-worth individuals often seek ways to minimize tax liabilities. Life insurance is an ideal tax planning instrument. It offers the following benefits:

Tax-Free Claim Proceeds: The death benefit paid to beneficiaries is generally tax-free, providing a significant amount of wealth transfer without tax erosion.

Tax-Deferred Growth: Cash value within certain life insurance policies grows on a tax-deferred basis, allowing the investment to compound without annual tax obligations.

Tax-Efficient Income Withdrawals: Life insurance policies can be designed to provide both life cover and a regular tax-efficient income withdrawal. This is a key feature for those looking to use their policy as a source of income in retirement. By accessing the cash value through policy loans or withdrawals, policyholders can receive income that is often tax-efficient, ensuring financial stability without significant additional tax burdens. This dual benefit of protection and income generation makes life insurance a versatile and powerful financial planning tool.

Creating a Large Legacy at Affordable Premiums

Premiums on Universal life insurance are significantly cheaper compared to conventional life insurance plans. The mortality risk expense is almost 30-40% lower. This makes life insurance an affordable and effective tool for the wealth for creating a large legacy.

Market Downside Protection

Certain life insurance policies are designed not to lose their value in falling markets. Once the policy has acquired a certain fund value, it has downside protection to ensure it does not fall below that value. This feature provides additional security and stable growth, making life insurance an even more attractive option for legacy creation.

Strategic Wealth Creation

Life insurance policies can be used to create and leverage wealth:

Premium Financing: Affluent individuals can use premium financing (especially when interest rates are low) to borrow money to pay for large life insurance policies, leveraging low-interest rates to amplify their coverage.

Policy Loans: The cash value in certain policies can be accessed via policy loans, providing liquidity without triggering taxable events.

Estate Equalization

Estate equalization ensures that all heirs receive a fair share, despite the disparity in the type of assets. It's about balancing the value each person gets so no one feels left out or treated unfairly.

Why is it Important?

Imagine you have three kids and want to leave an equal amount of inheritance for each of them.

You own the following assets:

1. Family Business with $5,000,000 - run by you and your first child
2. Investment Properties - $2,000,000
3. Investment Portfolio - $2,000,000

If you leave the business to the first child, investment properties to the second, and the investment portfolio to the third, the values might not be equal. This could cause conflicts or feelings of unfairness. Estate equalization helps to prevent this by making sure each child gets a fair portion of the total estate value.

How Does It Work?

Universal life insurance is an efficient way to equalize your estate.

Buy a Life Insurance Policy: for $6,000,000

Equalize the Inheritance: Use the life insurance to make up the difference of $3,000,000 each for the second and third child.

By doing so, you ensure that each child ends up with $5 million.

Business Succession Planning

For business owners, life insurance can play a pivotal role in succession planning:

Key Person Insurance: Protects against the financial impact of losing a key individual within the business.

Buy-Sell Agreements: Funded by life insurance, these agreements facilitate the smooth transition of business ownership upon the death of a partner or director of an LLC/FZC.

Charitable Giving

Many wealthy individuals use life insurance to support philanthropic goals. It is an efficient and affordable vehicle to leave a significant legacy to your preferred charity or religious endowment.

Conclusion

Why do the wealthy choose life insurance?

Life insurance can be much more than just a protection tool and the wealthy use it efficiently to make the most of it.

From tax efficiency and guaranteed wealth transfer to affordable premiums and market downside protection, life insurance provides a versatile and powerful tool for financial planning.

It helps in creating a large legacy, ensuring business continuity, and supporting charitable causes.

By leveraging these advantages, high-net-worth individuals can protect their wealth and ensure their legacy is preserved according to their wishes. This is why life insurance remains an essential part of financial planning for the wealthy.

Ready to Learn More?

Discover how life insurance can help you achieve your financial goals and secure your legacy. Arrange a meeting with us today to learn more about the strategic benefits of life insurance and how it can be tailored to your needs. 

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