Life Insurance for High-Net-Worth Individuals: Why It’s a Critical Asset

Life insurance can be an important asset for covering expenses after death. For young families, life insurance is often associated with income replacement—a safety net for providing for dependents in the event of the unthinkable. However, for high-net-worth individuals (HNWIs), it serves a more strategic purpose. Affluent individuals may leverage life insurance to help protect and potentially grow their wealth, minimize taxes, and create a lasting financial legacy. If you are wealthy, here’s why you may want to consider including life insurance in your financial strategy.

Estate Planning and Tax Efficiency

Many HNWIs wonder and worry how much their estate will lose to taxes after they pass away. If the federal state tax exemption decreases after 2025 as planned (barring legislation to extend it), life insurance could be instrumental in offsetting estate taxes.

In 2025, the federal estate and gift tax exemption is $13.99 million per individual ($27.98 million for married couples), up from $13.61 million ($27.22 for married couples) in 2024.  A 40% federal estate tax applies to gifts above the threshold—even more in certain states that impose their own estate or inheritance taxes.

With a sound life insurance policy—often inside an irrevocable life insurance trust (ILIT)—HNWIs can help preserve more of their wealth and relax, knowing their heirs will receive a tax-free death benefit to help with estate taxes and other costs. A life insurance payout provides liquidity so beneficiaries do not have to sell assets to cover taxes, and the estate stays intact. 

Retirement Planning for HNWIs Vs Average Income Earners

Planning for retirement is also different for a wealthy individual in comparison to the average retiree. Most people rely on Social Security and tax-deferred retirement accounts like 401(k) for income in retirement. However, HNWIs often have considerable taxable investments, real estate holdings, and business interests. These assets come with significant tax liabilities for retired HNWIs. 

A cash-value life insurance policy is a tax-efficient, permanent plan that builds cash value over time. This type of policy can be a useful asset for a HNWI. Part of the premium payment goes toward building cash value, which can then be used for a variety of purposes. Here’s how it works:

• Tax-free growth: The cash value of a permanent life insurance policy grows tax-deferred, allowing wealth to compound without annual tax implications.
• Tax-free withdrawals and loans: Retired HNWIs can borrow against the cash value of their life insurance policies without triggering taxable income. This approach can help manage tax brackets and minimize the impact of required minimum distributions (RMDs) from other retirement accounts.
• Supplemental retirement income: HNWIs can use life insurance loans to create a tax-free income stream in retirement. This prevents them from incurring capital gains taxes from selling investments. Life insurance also comes in handy in high-tax years, when other income sources can shift affluent individuals into a higher tax bracket.

Wealth Transfer and Legacy Planning

Leaving a financial legacy is a priority for many affluent individuals, and life insurance offers a way to transfer wealth efficiently. A well-constructed policy helps safeguard a tax-free inheritance that bypasses probate for heirs or philanthropic causes. Popular wealth transfer strategies through life insurance include:

• Irrevocable life insurance trusts (ILITs): ILITs allow the death benefit from a life insurance policy to be paid directly to a trust, which then distributes the proceeds to beneficiaries. Doing this keeps the death benefit outside an individual’s taxable estate, thereby reducing estate tax liability.
• Survivorship life insurance policies: These policies, also known as “second-to-die” policies, usually cover married couples and pay out a death benefit only after both insured individuals pass away. These policies help pay potential estate taxes upon the surviving spouse’s death.
• Charitable giving: Individuals can use life insurance for charitable giving, which reduces an estate’s taxable value while allowing HNWIs to support causes that are important to them.

Business Succession Planning

For business owners, life insurance is a key component of succession planning. Many HNWIs have substantial wealth tied up in their businesses. This can create liquidity complications if unexpected events or needs occur. Here’s how a life insurance policy can help.

• Fund buy-sell agreements: Business owners can purchase life insurance policies for each other, and when an owner passes away, surviving owners or heirs can use life insurance proceeds to buy the deceased owner’s share of the business.
• Replace lost revenue: Life insurance can cover expenses to maintain business continuity after the loss of a main executive.
• Equalize inheritance: Non-business heirs can receive a comparable inheritance to business heirs through life insurance when some are involved with the business and others are not.

For HNWIs, life insurance is a sophisticated financial vehicle that can help provide liquidity, aims to minimize taxation, potentially safeguards wealth, and helps with the smooth transition of assets to beneficiaries. Despite its versatility and usefulness, life insurance is often underutilized for reasons like focusing on traditional investments and limited awareness of life insurance’s tax benefits. Because HNWIs experience estate taxes, retirement income, and wealth transfer differently than those in lower income brackets, they may want to consider adding life insurance to their financial plan. If you are a HNWI looking to enhance your financial strategy, an SHP financial advisor can help. Contact us today for a complimentary review of your finances.