The accrual of wealth usually takes time and a strategic approach to investing. Shrewd decisions on where and how you invest your money can often pay dividends, and such a calculated, patient approach typically allows the wealthy to not only grow wealthier, but also to set themselves, their families, and their companies up for long-term success.
When planning for the worst, these individuals might believe that life insurance is an unnecessary add-on. They’re likely to think that the wealth they’ve accrued will cover all debts, including funeral costs, with plenty left over for beneficiary inheritances. But according to Greg Lee, managing director of premium finance for Bank of Texas Private Wealth the estates of high-net-worth individuals are subject to excessive federal taxes (as high as 40 percent), and some states can also levy their own estate taxes.
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“You don’t want to have loved ones or a company you built go through a liquidation because you didn’t put aside a way to cover the estate tax when you pass,” says Lee. “A life insurance policy can ensure your wealth goes toward your wishes and your legacy lives on after you’re gone.”
For that reason, high-net-worth individuals would be wise to consider life insurance policies, especially those that carry a cash value, since that value typically earns annual dividends or other returns on investment. “Life insurance with cash value is a type of permanent policy—whether whole or universal—that builds funds over time,” Lee explains. “When premiums are paid, a portion goes to policy charges and the remainder is invested and earns either dividend, interest, or other form of return on investment depending on the policy type.”
Here’s what you need to know about the specific policies:
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Whole life insurancecovers the policyholder for their entire life, assuming the premiums are paid. These policies with cash value can even pay for those premiums themselves, once they’ve accrued enough of that value. Both the premiums and the death benefits are fixed amounts, while the dividend or interest rate of the cash value can fluctuate periodically.
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Indexed universal life insurancealso provides a death benefit and carries a cash value; however, this policy offers tax-free growth and distributions. Indexed universal life insurance policies also allow holders to increase or decrease the premiums, as well as the death benefit, after the policy has been issued; however, those changes can have tax implications.
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Like indexed universal policies, variable universal life insuranceoffers a cash value that can be invested; however, unlike indexed policies, variable ones don’t guarantee a minimum return of zero. In other words, cash values can decrease during periods of poor investment performance. The upside is that these policies introduce investment options that can potentially yield higher returns.
Simply put, cash-value life insurance policies are appealing for several reasons. The cash value (aside from premium payments) grows tax deffered and can be passed on to beneficiaries tax-free, and as the cash value grows, it can be applied to high-dollar purchases, including homes, boats, and tuition payments. It can also supplement retirement income or be used as an asset to secure a loan. Policyholders can even authorize partial withdrawals to cover unexpected expenses or to take advantage of unique investment opportunities. In other words, it can serve as additional diversification of assets in a high-net-worth individual’s investment portfolio.
Better still, the premiums of a cash-value life insurance policy don’t need to be paid out of pocket each year. Some high-net-worth individuals—business owners with companies that are worth at least $25 million, for example, as well as real estate investors and executives of publicly traded companies with concentrated positions within their organizations—may discover that they can benefit from premium financing plans.
“The premiums are covered by the loan. The policy, cash, and securities are used as collateral,” says Lee, who explains that with premium financing, once the policyholder dies, the cash value of the policy pays off the existing loan and the death benefit covers any estate taxes. “The beneficiaries don’t have to liquidate any assets to cover these things and receive their inheritance in full.”
Like other types of loans, options exist for refinancing for more favorable terms, including lower interest rates and extended repayment periods. Policyholders can also pay off the balance of the loan, provided they meet certain criteria.
Naturally, those who are interested in pursuing this type of premium financing must first complete an assessment that evaluates their creditworthiness and financial stability. For that—and for those who have interest in cash-value life insurance and are comfortable paying annual premiums— Bank of Texas Private Wealth can guide them through every step of the process.
If you’re still unsure, consider this. No matter how a policyholder pays their annual premium, the money paid is invested into the cash value. If the premium is $1 million, for example, that amount (minus any policy charges and fees) can earn between 5 and 6.5 percent each year. “You can imagine,” says Lee, “how that will add up over time.”
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