Did you know wealthy people still use Life Insurance policies? Here are six reasons why wealthy people continue to use Life insurance policies, regardless of their wealth
Life insurance is a cost-effective financial tool that provides protection and financial security for individuals and their families, in the event of an unexpected death, disability or serious medical condition. Life Insurances also play an important part in helping business owners protect themselves and their families, from core business risks too.
Now while many people may associate life insurance with the middle class, it may come as a surprise to some that many wealthy individuals still choose to utilise life insurance as part of their overall financial planning, despite their already substantial wealth and reduced need for a financial safety net.
And here's why.
Read in this article
- Six reasons why wealthy people continue to use life insurance policies as part of their money management planning
- 1. Wealth Preservation (because keeping it can sometimes be as hard as making it)
- 2. Maintaining Liquidity and Estate Planning (because liquidy is king)
- 3. Solutions to Business Succession (because changing business ownerships can be complicated)
- 4. Certainty in Charitable Giving (because most charities listed in Wills receive nothing)
- 5. Backup Retirement Income (for when a medical emergency wants too much of your money)
- 6. Transferring Wealth with Privacy (because privacy brings stability)
- FAQ's
- If my family will inherit millions, why would I need life insurance? Don't they have enough?
- You mentioned using insurance for business succession. How does that work?
- Can I really use life insurance for charitable giving? Wouldn't it be easier to just leave money in my written Will?
- What do you mean by "privacy in wealth transfer"?
- Are you saying life insurance can act as a retirement fund?
- Sources & Further Reading
Six reasons why wealthy people continue to use life insurance policies as part of their money management planning
The six reasons below provide an insight into what it takes to keep your many matters stable and predictable, during periods of transition and significant change.
1. Wealth Preservation (because keeping it can sometimes be as hard as making it)
One of the primary reasons wealthy individuals opt for life insurance is to preserve their wealth for future generations. High-net-worth individuals often have significant assets, such as businesses, properties, and investments, (usually, all locked away and growing and usually not easily liquid) which they aim to pass on to their heirs. Life insurance can provide a tax-efficient way to ensure that the intended beneficiaries receive the desired amount of wealth while minimising taxes and other potential costs.
2. Maintaining Liquidity and Estate Planning (because liquidy is king)
Even though many wealthy individuals may have substantial salable assets, these assets might not be immediately liquid or easily divisible between beneficiaries equally without equalising their estate. Life insurance can bridge the gap between the illiquid nature of certain assets and the immediate cash requirements of debts, different types and ages of policy beneficiaries and other financial obligations. By providing a lump-sum payment upon the life insured's death, disability, serious illness, (or even terminal illness) a life insurance policy can help maintain a family's financial stability during a traumatic transition period in their lives.
3. Solutions to Business Succession (because changing business ownerships can be complicated)
It's no secret that many wealthy individuals are established business owners or entrepreneurs. Life insurance can play a vital role in ensuring a smooth transition of business ownership and leadership in the event of an unexpected death or disability. By nominating key individuals, business partners or family members as policy beneficiaries, life insurances can provide the immediate funds necessary to facilitate the orderly buyout of company shares, a business partner's share of a Partnership, while supporting the business's continuity, or compensate for the loss of the owner's expertise.
4. Certainty in Charitable Giving (because most charities listed in Wills receive nothing)
Philanthropy is a significant aspect of wealth management for many affluent individuals. Life insurance can be an effective tool for charitable giving, allowing them to make substantial contributions to their preferred causes or charities.
Pro Tip: Did you know that over 80% of all charitable donations made in a person's Will are overturned by the related beneficiaries and family members?
By naming a charitable organisation as a beneficiary of an insurance policy, an individual can more successfully leave a lasting legacy and continue supporting the causes they care about, by using a non-estate asset like an insurance policy that remains outside their Will, and therefore harder to challenge.
5. Backup Retirement Income (for when a medical emergency wants too much of your money)
Although many wealthy folks may already have amassed substantial investments and retirement savings, life insurance policies can serve as an additional source of backup retirement income. Certain types of life insurances, such as Disability or, Critical Illness can make funds available for serious unexpected disabilities or serious illnesses without triggering taxable events through the forced selldown of assets or investments or the need to downsize the family home to free up money.
Pro Tip: One in 5 Australians retire with a personal Disability or supporting someone who has.
6. Transferring Wealth with Privacy (because privacy brings stability)
For individuals who value privacy and confidentiality, life insurance offers a way to transfer wealth discreetly, free from the public availability of a Will.
Unlike ‘estate assets’ that may go through the public process of probate, life insurance proceeds are typically passed directly to the nominated beneficiaries, bypassing lengthy legal procedures, staying out of the public eye, and maintaining the family's privacy
While life insurance is often associated with financial protection for the middle class, it serves a unique purpose for wealthy individuals as well. From wealth preservation and liquidity needs to business succession planning and charitable giving, life insurances offers a range of benefits that can align with the goals and complexities of many medium to high-net-worth individuals.
By understanding these reasons, we can better appreciate why the wealthy continue to utilise life insurance as an integral part of their financial strategies and backup plans, and why we might benefit from using a similar strategy ourselves.
FAQ's
Your Wealth and Life Insurance Questions, Answered. Here’s a quick summary of what you need to know about Wealth, Liquidity and Life Insurances.
If my family will inherit millions, why would I need life insurance? Don't they have enough?
That's a great question, and it gets to the heart of how wealthy people think about their finances differently. The issue isn't just the amount of wealth, but its liquidity and accessibility. Your millions might be tied up in property, business assets, or complex investments that can't be sold overnight. Life insurance provides an immediate, tax-free cash injection to your family so they can pay debts, cover estate taxes, and manage expenses without being forced to sell valuable assets at a bad time. It's about a smooth transition, not just the final number.
You mentioned using insurance for business succession. How does that work?
For business owners, this is one of the most powerful uses of life insurance. Imagine you have a business partner. If one of you were to pass away, the surviving partner would suddenly be in business with the deceased partner's spouse or family—who may have no interest or experience in running the company. A life insurance policy, as part of a Buy-Sell Agreement, provides the surviving partner with the exact funds needed to buy out the deceased partner's share from their estate. This ensures the business continues seamlessly and the family is compensated fairly. It's a clean and effective exit strategy.
Can I really use life insurance for charitable giving? Wouldn't it be easier to just leave money in my written Will?
Leaving money in your Will is certainly an option, but it can be surprisingly messy. Wills can be contested by family members, and the process of probate is public and can take a long time. When you name a charity as the beneficiary of a life insurance policy, the process is different. The payout is quick, private, and cannot be challenged in the same way. It guarantees that the exact amount you intended goes directly to the cause you care about without any fuss or delay.
What do you mean by "privacy in wealth transfer"?
When your assets are distributed through your will, the document becomes a public record through a process called probate. Anyone can find out who got what. For many people, their financial affairs are a private matter. Because life insurance pays out directly to a nominated beneficiary, it bypasses your will and the public probate process entirely. It allows you to pass on wealth to your chosen heirs discreetly and confidentially.
Are you saying life insurance can act as a retirement fund?
Not exactly as a primary retirement fund, but more as a critical backup plan. Let's say you suffer a major medical event, like a heart attack or cancer, and you have a Trauma insurance policy. The lump-sum payout from that policy could provide you with the funds you need to live on without having to sell off your income-producing investments or dip into your superannuation ahead of schedule. It protects your long-term retirement strategy from being derailed by an unexpected health crisis.
Sources & Further Reading
- Moneysmart - How life insurance works This foundational guide from ASIC explains the different types of life insurance and the role of beneficiaries. It provides an authoritative overview of how policies function to provide funds directly to nominated parties, bypassing the will.
- Australian Taxation Office (ATO) - Buy-sell agreements This official government resource explains the purpose of buy-sell agreements and their tax implications, validating their use as a formal business succession planning tool often funded by life insurance policies.
- Legal Aid NSW - Challenging a will This government resource outlines how a will can be contested in NSW. It provides context for the article's point that life insurance payouts, which go directly to beneficiaries, are a more private and less contestable method of wealth transfer.
- Australian Communities Foundation - Charitable Giving Options While not a direct government source, this peak body for community foundations explains various methods of structured giving. It provides context for how life insurance can be used as a vehicle for significant philanthropic donations, separate from a will.
- U.S. Securities and Exchange Commission - Liquidity Although an American source, this page from a major government regulator provides a universal and clear definition of liquidity. It helps explain the core financial concept behind why having immediate cash from insurance is vital, even for asset-rich estates.
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Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
