Contents
Life Insurance Insights
Comprehensive guide to life insurance strategies for estate planning and wealth transfer
Overview
Life insurance serves multiple roles in comprehensive financial planning for high net worth individuals. Beyond simple income replacement, it provides estate liquidity, enables tax-efficient wealth transfer, and can serve as an asset class within a diversified portfolio.
Primary Uses in Estate Planning
- Pay estate taxes without liquidating assets
- Equalize inheritances among heirs
- Fund buy-sell agreements
- Replace wealth donated to charity
Tax Advantages
- Income tax-free death benefit
- Tax-deferred cash value growth
- Tax-free policy loans
- Estate tax exclusion (with ILIT)
Modified Endowment Contract (MEC) Warning
Overfunding a life insurance policy can create a MEC, eliminating many tax advantages. Work with experienced advisors to structure policies correctly.
Types of Life Insurance
Hybrid Products
Modern insurance products often combine features:
- • Indexed Universal Life: Links growth to market index with downside protection
- • Long-Term Care Riders: Access death benefit for long-term care needs
- • Return of Premium: Get premiums back if you outlive the term
- • Survivorship Policies: Cover two lives, pay at second death
Common Strategies
Irrevocable Life Insurance Trust (ILIT)
Remove life insurance from taxable estate
Key Points
- •Keeps death benefit outside estate
- •Protects from creditors
- •Can leverage generation-skipping planning
- •Requires giving up ownership
Considerations
- !Three-year lookback rule
- !Cannot change beneficiaries
- !Trust must pay premiums
- !Crummey notices required
Premium Financing
Borrow to pay large insurance premiums
Key Points
- •Preserves liquidity
- •Leverage for larger policies
- •Interest may be deductible
- •Exit strategy crucial
Considerations
- !Interest rate risk
- !Collateral requirements
- !Complex arrangements
- !Best for $5M+ policies
Split Dollar Arrangements
Share premium costs and benefits
Key Points
- •Employer/employee arrangements
- •Family split dollar options
- •Economic benefit regime
- •Loan regime alternatives
Considerations
- !Complex tax rules
- !Regulatory compliance
- !Exit planning important
- !Professional guidance essential
Charitable Planning with Life Insurance
Leverage insurance for charitable goals
Key Points
- •Charity as owner and beneficiary
- •Income tax deduction for premiums
- •Wealth replacement strategies
- •Testamentary charitable gifts
Considerations
- !Irrevocable commitment
- !Charity must have insurable interest
- !Annual deduction limits
- !Estate tax benefits
Estate Equalization Example
Situation: Business owner with $20M estate - $12M business, $8M other assets
Challenge: One child active in business, two others are not
Solution: $8M life insurance policy owned by ILIT
- • Active child inherits business ($12M)
- • Other children split insurance + other assets ($8M each)
- • All receive equal inheritance, business stays intact
Carrier Considerations
Selecting the right insurance carrier is as important as choosing the right policy type. For high net worth individuals with substantial coverage needs, carrier selection becomes critical.
Financial Strength
CriticalLook for ratings from A.M. Best (A+ or better), Moody's, S&P, and Fitch
Product Suite
HighEnsure carrier offers products matching your long-term planning needs
Underwriting Flexibility
HighImportant for complex health situations or high coverage amounts
Claims Payment History
CriticalResearch carrier's track record for paying claims promptly
Premium Stability
ModerateHistorical premium increases for universal life products
Service & Technology
ModerateOnline access, customer service quality, and advisor support
Major Carriers for HNW Market
While we don't endorse specific carriers, these companies are known for their high net worth and advanced markets expertise:
- • Penn Mutual
- • Pacific Life
- • John Hancock
- • Prudential
- • Lincoln Financial
- • Nationwide
- • New York Life
- • Northwestern Mutual
Always compare multiple carriers and work with an independent advisor who can access various options.
Illustration Analysis Tool
Illustration Best Practices
Always request illustrations at multiple interest rate scenarios. Focus on guaranteed values for conservative planning. Non-guaranteed projections are not promises of future performance.
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