Whole life insurance is a type of life insurance coverage that most people do not need. It’s much more expensive than a term life insurance policy, as a term policy remains in effect only for a set period. A permanent or whole life policy is intended to remain in effect indefinitely.
Most people don’t need life insurance forever, as their dependents eventually stop relying on them to earn income. In that case, paying extra premiums to keep coverage active for a person’s whole life doesn’t typically make sense.
However, there is a possible exception to this general rule. People who are wealthy may want to buy a whole life policy. Here’s why.
This is the benefit of a whole life policy for wealthy Americans
For many rich people, it makes sense to purchase whole life insurance, because this kind of policy can provide a death benefit to loved ones that is generally tax free. And this money can be used to pay estate or inheritance taxes, so that other estate assets do not have to be liquidated to cover this cost.
On the federal level, there is an estate tax charged on larger estates. The estate itself pays this tax. Some states also impose their own inheritance taxes on heirs and/or estate taxes on the estate as well.
The tax bill on larger estates can often be substantial. And if there are not enough liquid assets in the estate, then it could become necessary to sell property to cover the costs.
Say, for example, a wealthy person leaves a large home to a loved one that is valued at several million dollars, alongside other transferred assets. If estate taxes or inheritance taxes have to be paid, the bill could run to hundreds of thousands of dollars. If, further, there isn’t other money in the estate that could be used to pay these taxes, then surviving family members might have to sell the home (or mortgage it) to get the money to pay the taxes that are due.
A whole life policy could provide access to a source of funds that is very liquid, and that can be used just to cover required tax costs. When the insurer cuts a check for the death benefit, this money could then be used to pay the estate tax or inheritance taxes, ensuring no other assets need be sold and the estate can remain intact.
Since the need to avoid a big tax bill would most likely not ever go away for wealthy people with substantial assets, a death benefit would always be needed to cover these taxes. This means a term life policy that offers protection only for a limited number of years might not be the best choice. Permanent life insurance that’s always there to pay the tax bill would be a better bet.
Is buying a whole life policy a smart idea?
There are many different estate planning techniques wealthy people can use to try to minimize taxes and keep their estate intact. Buying a whole life policy is just one of the different approaches a person could use to shield their wealth from the government.
But since it is simple and easy, and since the premiums on a whole life policy should be affordable for those with higher incomes or more assets, buying a whole life plan is worth looking into.
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