Why Would A Wealthy Person Own Life Insurance?

Almost every person thinks if they have enough wealth when they die, their family would be fine without life insurance. Some of them are wrong, and many of them leave cash on the table by not digging a little deeper.

Who was Malcolm Forbes?

Malcolm Forbes was the flamboyant publisher of Forbes Magazine. He died in 1990 with a net worth of at least $500 million. His holdings other than Forbes Magazine included the largest Harley-Davidson dealership in New Jersey. He had been unhappy with the service, so he bought the dealership. We all do that sort of thing. He owned a jet named the Capitalist Tool, a fleet of hot air balloons, one was the shape of his estate in Normandy, and a yacht, The Highlander, that often took to the seas with associates and clients. It was the party boat of the ’70s and ’80s. His collection of Imperial Faberge eggs, 12 at his death, more than the Kremlin-owned, was his passion.

If you get a chance, take a look at his book, “More Than  I Dreamed.”

Malcolm Forbes believed in Life insurance.

At the time of his death, life insurers paid his estate more than $70 million.

His family would not have had to live in a fourth-floor walkup had he not had it, but he did it anyway. Have you wondered why? Think about it. There was no serious financial player in the world who would not have taken his phone call. With access to the very best minds available, how did he come to own life insurance, of all things?

In his words, “It’s an efficient way to transfer wealth to your heirs.”

It really is as simple as that.

What’s efficient about it?

It provides liquid assets to an estate or heirs when liquidity may be in short supply. If your estate owes money for taxes, to eliminate debt, or to make specific cash bequests, the cash received will prevent the forced sale of other valuable and often illiquid assets. When you must sell to raise cash, the tendency is to sell the best and keep the rest. That is antithetical to wise wealth-building rules.

Life insurance can provide value in your estate that far exceeds what a similar investment would provide. Notice the investment return if you die too soon. Very high. If you live to very old age, it will still provide a yield higher than 4% after taxes. Many people use the bonds they had set aside for estate expenses and funnel them into an insurance policy. As bond yield increases the value of a participating policy will too. A very large share of the assets the insurer owns to support their reserve are bonds.

In situations like this, life insurance works because the investments attract a management fee of only a few basis points, the income within the plan is almost untaxed while it accumulates and is tax-free at death.

There are several formats for the policies. With care, they can be designed to match your needs and your resources.

Who does it?

A few years ago, a policy over $200,000,000 was delivered in California. Apparently to Elon Musk. Another of the not-so-dumb crowd.

What to do next.

Explore the potential value of an insurance portfolio. You may not be medically able to get the coverage, or the benefits may not suit your plan. You will decline to proceed. That too would be a benefit. A negative decision feels better when you know why you said no. Wondering if it might work is debilitating. Check it out and make a reasoned decision.

The bit to take away

Properly designed life insurance solves estate problems efficiently. Take a look before saying no.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

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