There are a number of myths surrounding insurance for the wealthy. Don’t be fooled by these misconceptions.
As a high-net-worth individual (HNWI), it may be tempting to think insurance isn’t essential since your financial security seems assured. But have you considered future risks? Financial market uncertainties, tax liabilities, debts, and expenses? No matter how well your investments perform and how high your current net worth is, it’s wise to ensure long-term protection for your assets, income, and investments.
The purpose of wealth management and estate planning is to guarantee not just your own security, but that of your dependents in the event of your death. Insurance can be a critical facet in a sound long-term financial strategy, particularly if the total worth of your assets is greater than the federal tax exemption threshold. The tax liabilities can be significant, even if you have a good estate transfer plan in place.
As of 2022, the first $12 million of a deceased’s estate is tax-free, after which a federal tax rate of 40% is levied. While married couples can combine this exemption, effectively doubling the threshold, these laws nonetheless impose a particularly high burden on large estates. This is where insurance can operate as a buffer to take care of the immediate financial responsibilities.
There are a number of myths surrounding insurance for the wealthy. Don’t be fooled by these misconceptions. Securing your and your family’s prosperity requires both sound investments in the present as well as strategic insurance and strategic planning for the future.
Myth 1: High-Net-Worth Individuals Do Not Need Life Insurance
In today’s volatile financial climate, the idea that “self-insurance” is enough to maximize wealth preservation is a widespread misconception. Life insurance isn’t only for the average consumer. High-net-worth insurance solutions can have a substantial impact on protecting your legacy and ensuring your wealth passes to future generations.
The Covid-19 pandemic has precipitated a number of challenges for HNWIs, such as travel restrictions, business uncertainty, low-interest rates, and market instability. It has also made HNWIs address their own mortality, as the pandemic has hit our retirement age community harder than any age group. High levels of personal wealth are not always enough to ensure that there will be adequate funds to cover immediate expenses in the event of your death. This is particularly true if your assets are not sufficiently liquid to accommodate a large tax payment within the required period.
Life insurance can be an important financial tool with substantial benefits for HNWIs. Life insurance policies can be issued in ways that won’t be counted as part of the deceased’s estate and hit with state or federal taxes. They can be instrumental in offsetting estate taxes and providing liquidity to pay these taxes without being forced to sell family assets.
Certain life insurance policies may also offer more than a death benefit. Some have a cash value that can be tapped into in times of need, or can also suffice as collateral for loans. There are many scenarios in which such a policy might prove beneficial.
Is your business properly prepared to continue operating without you at the helm? You might need to establish a “key person” life insurance policy to protect your business and cover any potential losses. Insurance benefits can also ensure your firm’s stability when funding a partnership buyout or paying off outstanding business-related debts.
Life insurance offers a vital safety net for your beneficiaries, covering medical costs and other liabilities in the short term. Also consider the estate’s ongoing obligations, such as your family’s future educational needs and lifestyle maintenance, provisions for a special-needs dependent, or philanthropic considerations.
The right life insurance policy can also be part of your retirement plan, allowing you to slow down, relax and enjoy your golden years. There’s peace of mind in knowing your assets are protected and your family taken care of after you are gone.
Myth 2: Health Savings Accounts Are Only for The Elderly
Regardless of your age, a health savings account (HSA) constitutes a highly effective and tax-efficient long-term savings vehicle. For example, HSAs can roll over indefinitely without penalties. Contributions and earnings are fully tax-deductible, and funds can be withdrawn tax-free to pay for qualified medical expenses.
When coupled with a high-deductible health plan (HDHP), an HSA provides you with a dedicated medical expenses savings account in addition to these tax benefits. Moreover, your HSA stays with you irrespective of changes to health insurance, including when you change employers or retire, as you enjoy complete ownership of the funds.
Certain special benefits apply for older individuals. For example, those 55 and older are allowed “catch-up” contributions above the annual maximum. Those 65 and older can also use their HSA, penalty-free, for non-medical expenses (though ordinary income tax rates apply), receive benefits for preventive care and prescription drugs related to chronic care conditions, and use HSA funds for Medicare payments. If you retire before the age of 65, HSAs can also help bridge the gap prior to the start of Medicare eligibility.
High-net-worth individuals can also leverage important healthcare tax savings and tax-free investment advantages, making HSAs the ideal complement to your arsenal of insurance and retirement savings solutions. Capitalize on the tax-free growth potential of your HSA by paying the maximum annual contribution. Set some of your HSA aside to pay for short-term medical expenses, and then save the rest for the highest growth potential. This ensures funds will be available to cover all your healthcare expenses during retirement.
HSAs can also play a role in estate planning, as there are instances where these funds can be passed on to your dependents. A qualified wealth management specialist can help you navigate these rules.
Myth 3: Asset Protection Is Only for Ultra High-Net-Worth Individuals
Conserving and shielding assets is an essential part of financial planning, and crucial for anyone serious about reducing their exposure to risk, no matter their wealth. Risks to both business and personal assets abound, and not just for the ultra HNWI. Consider claims for damages, lawsuits, product or professional liability, debt and/or mortgage commitments to creditors, as well as consumer protection problems.
When looking at how much coverage you will need, take the nature of your assets into account. Stocks, bonds, and bank accounts are generally considered safe, low-risk assets. On the other hand, commercial property and rental real estate come with significantly more risk.
Safeguarding assets starts with protection from bank or brokerage failure. Deposit and securities insurances are available through the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC), respectively.
Personal insurance is also key to a successful asset protection strategy. Basic liability coverage includes home and motor vehicle insurance. Individuals with substantial portfolios should consider an umbrella insurance policy to further extend liability coverage.
A business owner policy (BOP) is advisable for most small- to medium-sized businesses. This includes comprehensive property, liability, and other forms of asset protection. Medical professionals, accountants, lawyers, architects should also invest in professional liability coverages. Further, if you serve on a board, directors and officers (D&O) insurance is worth looking into if the company doesn’t offer its own coverage.
Setting up separate legal entities (such as S or C corporations, LLCs, or trusts) is another common tactic for preserving valuable assets. While some individuals transfer assets to family, this course of action is far from foolproof, due to issues such as gift tax or divorce. An LLC generally offers the best protection for businesses and professional practices. It also proves more flexible and less-expensive than a C corporation.
Wealth Management Expertise Is Key
Considering the vital importance of insurance and asset protection for high-net-worth individuals, it’s important to partner with a wealth management and financial planning expert. Employ professional knowledge and foresight to help you select the insurance and investment vehicles best suited to your portfolio and provide you with the tactical advice to meet your current and future financial needs.
At Polaris Wealth Advisory Group, our team of experts can handle every element of your financial planning, from investment strategies and estate planning to asset protection and risk management. It’s time to protect your assets and secure your financial future. Contact Polaris Wealth today.
This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.