Integrating Life Insurance Into Wealth Management

A surge in high-net-worth individuals presents a major opportunity for insurers to reshape and reimagine how they optimize their clients' wealth.

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The 2023 Global Wealth Report has predicted that global wealth will increase by 38% over the next five years, with the number of high-net-worth individuals (HNWIs) likely to increase to 85 million by 2027. That would be a 71 million increase from the start of the century. The ultra-HNWI (UHNWI), with wealth exceeding $50 million, is projected to rise to 372,000 by 2027, with more than half living in the APAC region. The growth of this market presents a significant opportunity for insurance companies to reshape and reimagine how they optimize their clients' wealth.

One way advisers can help clients is through life insurance. Life insurance can be an intelligent and reliable wealth management strategy that can help mitigate risk for HNWIs at a time dominated by uncertainty, continued inflation concerns and significant financial complexity. It can allow HNWIs to maintain their focus on diversifying and extending their portfolios while allowing for increased asset protection and risk mitigation. 

A variety of different approaches may be of interest to them, depending on their needs and circumstances. Life insurance can be used as a financial vehicle that helps preserve wealth while building and securing it for future generations. It is a form of estate planning that allows for HNWIs to help ensure their assets are distributed and managed in accordance with their wishes. Depending on the type of insurance plan, life insurance can also accumulate a cash value over time that can be accessed while the client is still living to use as supplemental income or even cover unexpected costs. 

Life insurance can be incorporated into a wealth transfer strategy using an irrevocable life insurance trust (ILIT) that designates the trust as both the owner and the beneficiary of the insurance policy. As HNWIs have a significant estate, they may be subject to estate taxes. Mitigating the estate tax burden is a core value of a well-structured life insurance policy, as it delivers exemption from estate taxes on the death benefit and ensures that the estate has the necessary funds to cover estate taxes and other expenses. An ILIT is a smart strategy that delivers immense value.

Individuals looking to keep the insurance out of their estate may also consider alternatives such as a beneficiary defective inheritance trust (BDIT), which is a type of irrevocable trust; life insurance limited partnerships (LPs), which limit the personal liability; or a dynasty trust, which enables wealth to be passed on from generation to generation. 

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HNWIs can also better manage the financial future of their estate and beneficiaries by placing a percentage of their premium into a cash-value account that accumulates on a tax-deferred basis. These funds can also be accessed on demand without incurring taxes. However, assets in retirement accounts will be taxed, so HNWIs should consider leveraging low-income tax rates by shifting to life insurance to help offset the risk of increases in taxation as of 2025. 

Life insurance can also help to ensure equal distribution of the estate among all beneficiaries. If there is a family business or real estate that isn’t easily divided among recipients, life insurance can be used to distribute inheritance fairly among specific, named beneficiaries. This means that business continuity is maintained posthumously and that there is a smooth transition of ownership while ensuring that surviving family members are provided with financial stability. 

The same approach can be applied to charity commitments. If an HNWI wants to nominate a specific charity as a policy beneficiary, life insurance can be structured to provide continuing contributions for organizations they're passionate about.

Having an adequate policy in place can provide peace of mind for clients and their beneficiaries. This also allows the HNWI to spend more time focusing on other financial plans and goals they may have while they’re still living.

The payouts from life insurance can be extensive with HNWIs, so avoiding unnecessary taxation is invaluable. However, there may be federal and state taxes added to life insurance payouts in some instances. It’s key that HNWIs have a trusted, expert financial professional to help them navigate the risk and structure of their policies and help to ensure that the policy complies with all state and federal tax regulations. 

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A specially designed life insurance developed by a financial adviser with clear visibility into tax-advantaged growth, flexibility, estate and wealth management and policy growth can help ensure HNWIs maintain visibility and retain value within their estates. The key is to collaborate with a company that has a proven, in-depth understanding of the nuances of this environment, the legal requirements and the structuring of ILITs. 

While clients bring their portfolios to advisers who have the professional expertise to manage their wealth, they are also looking for partners who genuinely have their best interest in mind. Building trust and a good rapport with a client can be just as important as having a professional background. 

The right company can help ensure that an HNWI’s insurance policy is tailored to individual needs and align with broader financial goals and estate planning objectives. HNWIs can optimize and strategize within clear frameworks that deliver a lasting impact and allow for them to navigate the future with confidence as they have a robust financial plan in place to address their unique circumstances.

Shawn Goheen

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Shawn Goheen

Shawn Goheen is a partner at Goheen Insurance, a Simplicity company, 

A 33-year veteran of the insurance industry, he helps provide solutions to estate tax issues and high-net-worth individuals to preserve their financial legacy. 

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