How wealthy do you have to be to not need life insurance?
(3 min read)
Well if you take it from the billionaire who broke the world record and bought $201 million dollars of life insurance on himself, there really never is a net worth that is too high for life insurance.
Do we all need $201 million of life insurance? Of course not. But there are some important lessons to be learned about why it made sense for this billionaire to buy life insurance and why it makes sense, regardless of your net worth, to purchase some.
He was interviewed, and the obvious first question was ‘you’re a billionaire, why do you even need life insurance’?
His answer made complete sense.
Of course has a lot of assets, and he wants to pass these down to his kids and grand kids. The problem is many of the assets a persona typically wants to pass down can’t be done on a tax-free basis.
He said the tax bill that will be owing when he passes away is enormous, and buying this life insurance policy was the cheapest and safest way to come up with a future sum of money i.e. $201 million.
In other words, he needs $201 million dollars to pay the taxes, and rather then keep $201 million in cash, he would rather pay the life insurance premiums which are significantly cheaper, in exchange for $201 million to be paid out tax-free and solve this tax issue when he passes away.
Here is a good rhetorical question – do you have house insurance? why?
Most likely because if your basement ever flooded or your house burnt down, the insurance company would be on the hook to pay for it to be fixed, not you, right?
Do you keep money aside in your bank account to rebuild your house? If your home is worth $1M, do you keep $1M in cash in your savings account specifically to rebuild your house if you ever needed to? of course not.
Instead, you pay a small fee, called an insurance premium, which goes into a large pot of money. In exchange for your premium, the insurance company guarantees through a contract to dip into this big pot of money and pay for your home if you ever need it.
Even if you did have $1M in cash, why would you keep it on the side? It would be much cheaper to pay for house insurance then to always have $1M in cash sitting idle.
Now if your house is worth $5M, does that mean you don’t need house insurance anymore? no, in fact it means you need more.
The same principle applies with your net worth and the amount of assets you have. If you have acquired enough assets in your lifetime where your family would be financially stable if you passed away, that is a great accomplishment.
But, that doesn’t mean you don’t need life insurance.
Why would you want your family dipping into your savings? Selling off assets? It’s highly doubtable the point of this money was too be kept aside in case you passed away.
It would make far more sense to use a fraction of your money to pay a small fee for a life insurance policy. This way, you can use your current assets during your life time and in case something happened to you, your family would receive a tax-free payout.
Now, the insurance company is working for you.
Ultimately life insurance is putting in a bit of money now for a larger sum in the future. It’s a contract, it’s guaranteed and it’s a way to maximize your dollars. If you wouldn’t risk cancelling your house insurance, then don’t risk not having life insurance, regardless of your net worth.
We all don’t need $201 million, but we need some.
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