Most often, insurance is understood as either a tool for managing financial liabilities (automobile, property-casualty coverage) or for replacing income in the event of the loss or disability of a breadwinner (life or disability insurance). Certainly, these two functions are important and vital for most individuals. Indeed, proper liability coverage is required by most lenders in order to purchase a home, finance an automobile, or perform many other common transactions, and for young families, life insurance can help to preserve financial stability in the face of great loss.
But insurance of various types may have a larger role to play, especially concerning the preservation of wealth. Further, rather than being the concern primarily of younger persons on whom family members depend for sustenance, insurance as a tool for preserving wealth may be an important aspect of overall estate or business continuation planning, even for older persons, including those approaching or in retirement. Understood in this way, insurance becomes a tool for risk management, a process important to the preservation and growth of multigenerational financial legacies.
Following is a brief summary of the ways insurance of various types can fit into a risk management program for preserving wealth.
- Business continuation. Depending on how the enterprise is organized, life insurance policies on one or more key individuals may be useful for preventing liquidity problems for the business in the event of the passing of a key person who is responsible for a large proportion of the business’s revenues. In other instances, a properly structured life insurance agreement can be used to fund a buy-sell agreement for the benefit of those who stand to continue the business following the owner/founder’s passing.
- Professional liability. Beyond life insurance, professional liability coverage can also be a vital risk management resource, potentially protecting business owners and professionals from claims of negligence, malpractice, or errors in their services. This may be of greatest importance for professionals like doctors, lawyers, and financial advisors, who are at higher risk of litigation. Proper liability coverage can protect business and personal assets from potentially devastating legal claims by covering the cost of legal defense and any resulting settlements.
- Estate planning and liquidity. Those with significant estates may benefit from the use of a properly structured life insurance trust to provide liquidity for expenses involved in settling the estate upon the death of the founder. By placing the policy in an irrevocable life insurance trust, the death benefit can often be excluded from the taxable estate. This strategy can help offset the expense of estate taxes, protect the policy from creditors, and ensure that the insurance proceeds are distributed according to the wishes of the insured. Indeed, the will or trust should outline how any insurance proceeds will be distributed, ensuring that they are aligned with the overall estate plan. Such integration helps avoid conflicts or confusion among heirs and aligns all aspects of the wealth preservation strategy to work together for the beneficiaries’ best interests.
- Charitable Giving. Life insurance may be an excellent way to provide meaningful assets to charitable causes people have supported throughout their lives. One particularly interesting approach is to leave tax inefficient assets to charities and then use tax free life insurance death benefits to “reforest” those assets for loved ones, creating a structure where the charity wins, the family wins, and the IRS loses.
- Personal liability. As with business liability coverage, personal liability insurance, such as that provided by a so-called “umbrella policy,” can provide liquidity in the event that an individual is held liable for a significant accident or injury and the claim goes beyond the limits of other resources. Such policies often begin coverage where other policies, such as a personal automobile or homeowner’s policy, hit their upper limits. Appropriate use of personal liability coverage can protect the estate from expenses incurred by liability or litigation, preserving assets for heirs and other beneficiaries.
- Long-term care. With more individuals living into their 80s, 90s, and beyond, the chance that a given person may require long-term care at some point in their lives is increasing. Long-term care insurance (LTCI) provides coverage for the expenses of skilled nursing care beyond the period allowed by Medicare, which typically ceases at about 100 days. For those who require longer-term assistance with the activities of daily living (ADLs), such as getting out of or into bed, mobility, dressing, feeding themselves, or maintaining basic personal hygiene, LTCI can provide financial resources that can cover the cost of professional nursing care, home health aides, or other professional services designed to assist those who cannot perform basic ADLs on their own. Proper utilization of LTCI coverage can preserve assets for the estate that would otherwise be consumed by the costs of providing the necessary care.
Your Rothschild advisor can be a valuable source of information about using various forms of insurance as risk-management and estate-preservation tools. If you have questions about potential vulnerabilities, or would simply like to explore these topics further, please get in contact with your Rothschild advisor.
Disclosure: Insurance products are offered through licensed professionals and subject to policy terms and state availability. This content is for informational purposes only, not a recommendation.
