Almost everyone knows that death and taxes are inevitable. For both of these reasons, you may need life insurance. Like a Swiss army knife, life insurance can do a lot. There are several reasons why you might consider buying life insurance…
You love someone: You can use life insurance to create an estate. Here, you want the people who mean a lot to you, like your spouse and children, to be financially secure if you’re not there to make it happen. The purpose of life insurance in this situation is to act as a financial safety net.
You owe someone: Because of the guaranteed death benefit, life insurance can be very helpful when it comes to paying off debts and settling taxes owed. For example, above a certain level of wealth, inheritance tax comes into play and life insurance is often used so that the family does not have to exhaust the estate.
“Successful and wealthy people often turn to life insurance to cover property taxes,” says Vince Annable, CEO and Founder of VFO Advisory Group and co-author of Your High Performance Virtual Family Office: Maximizing Your Financial and Personal Life. “For just about everyone, and especially the very wealthy, well-structured life insurance can be a cost-effective solution to estate taxes. Additionally, people can pay for their life insurance in a variety of ways, including using pre-tax dollars.
You have a strategic need for life insurance: There are several powerful uses for life insurance in business situations. Many entrepreneurs can take advantage of life insurance to pay for executive benefits or dramatically increase the amount of money they have in retirement. You may find that buying life insurance for essential business purposes, for example, to provide the funds needed to replace a key employee or to buy out a partner’s heir, makes sense.
“There are a wide variety of ways to use life insurance to achieve personal goals,” says PJ DiNuzzo, founder and principal consultant of DiNuzzo Middle-Market Family Office and author of the Wall Street Journal bestselling book, The DiNuzzo Middle-Market Family Office™ Breakthrough: Creating Strategic Tax, Risky Cash Flow, and Lifestyle Options for Successful Private Business Owners and Affluent Families. “For example, you can use life insurance to directly create greater personal wealth by leveraging a policy’s investment account. Additionally, some people find life insurance to be a very effective way to support causes close to their hearts.
Take a decision: These three motivations can be, and often are, interrelated. Most financial concerns do not exist in a vacuum. Although there are many reasons to buy life insurance, you need to be very clear about your reasons. While you determine that buying life insurance is worthwhile, you still need to decide on the right amount of life insurance and structure it properly based on your goals.
“Too often, life insurance is oversold, causing people to buy the wrong policies as well as an excessive amount,” says Homer Smith, founder of Konvergent Wealth Partners and co-author of Optimizing Clients’ Financial Lives: Harness the Power of an Accounting Firm’s Elite Wealth Management Practice. “What’s important is that each person makes sure they get the best possible outcome, which means getting the right amount of life insurance in the best possible way. For most people, the only way to be sure they’re getting the right amount of life insurance, using the best policies for their schedules, and not paying too much is to s rely on the professionals they trust most, which are usually their accountants and lawyers.
According to Justin Breen, the engine of exclusive network BrEpic and co-author of Superior results: Maximize the value of your high-performance family office, just like the super-rich, “In addition to being advised by professionals, you should always know what you are buying. You want to make sure you understand the different options available. This includes possible alternatives to purchasing life insurance. Getting involved and asserting yourself is often a necessity. This will help you make informed decisions.
RUSS ALAN PRINCE is executive director of Private Wealth magazine (pw-mag.com) and chief content officer for High-Net-Worth Genius (hnwgenius.com). He consults family offices, quick-and-rich entrepreneurs and selected professionals.
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