At my company, we regularly work with high-net-worth individuals and some of these folks have tremendous wealth. Earlier in my career, I would be somewhat intimidated by them because they had amazing stories of success, and they could hop on their private jets and travel anywhere in the world with the same level of ease that the rest of us go to the grocery store.
Yet as time wore on, I started to learn that even the wealthiest people in America are generally down-to-earth folks who have worked very hard to earn their money, build their fortunes and retain their wealth. And just as Sam Walton, the founder of Walmart, drove a pickup truck until the day he died, many extremely wealthy people wear jeans, shop for bargains and don't like to overpay - for anything.
Aside from learning about wealth creation, high-net-worth people can also teach us a great deal about many financial tools, including life insurance.
- Liquidity. When someone passes away, their assets may not be easily transferred into cash. The principle holds true for a mansion in the Hamptons or a ranch house in the suburbs. Life insurance enables surviving families to cover costs associated with the death of a loved one -- as it may take time to sell the family home or turn other assets into cash that is more easily divided among heirs.
- Income replacement. Wealthy folks worry about money too but maybe just on a different scale. How families will continue if a primary bread winner passes away is a relevant concern across all income groups.
- Wealth transfer. While the average person may not be considering trust funds for their grandchildren, we all work hard for our money and we hope we can pass down the money we don't need to our loved ones.
Lesson Two: Financial plans for the future should include life insurance
High-net-worth people consider life insurance a powerful tool that helps them hedge against the knowns and unknowns in life.
It's true that many wealthy people buy life insurance to help pay future estate taxes: something most of us don't worry about. The important lesson is that we should all be looking down the road at the future costs that will impact our heirs when we pass away. If you have accumulated a certain amount of wealth, a portion of your estate may be taxable and you may not want your heirs to have to pay extra taxes. If you own a business with a partner, you may want to use insurance to fund a buy/sell arrangement if you pass away unexpectedly. If your family business is reliant upon you in order to survive, perhaps a key-man policy is in order. Life insurance is a tremendous tool that has value far beyond the traditional reasons.
Wealth individuals also recognize that their goals and needs change, so life insurance should be regularly evaluated. Needs change and sometimes better insurance products come along or circumstances change so that coverage should be modified.
Lesson Three: Life insurance is an asset
Savvy and wealthy individuals recognize that life insurance is not just a tool but also an asset. In some instances, it has a precise cash value but always carries an intrinsic value. When a life insurance policy is no longer needed, it can often be sold through a transaction known as a life settlement. This is not an option solely for the super rich but one that any senior or baby boomer with an insurance policy can explore. Holders of whole or term insurance may be eligible to sell a policy on the open market for an immediate cash payout.
While we can't all expect to join the ranks of high-net-worth Americans, we can employ the same financial tools to protect our personal fortunes and pay for retirement.