Contributed by: Caleb Christian, CFP, CLU, ChFC
Reconsidering Life Insurance: Seven Misunderstandings Wealthy Families Should Avoid
Among individuals with significant wealth, life insurance is often viewed as unnecessary. With assets sufficient to cover family needs, taxes, and liabilities, the assumption is that life insurance serves little purpose. Yet this view overlooks how insurance can function as a strategic planning tool—enhancing liquidity, preserving flexibility, and supporting the execution of more sophisticated estate and legacy plans.
Life insurance, in this context, is not about protection from financial hardship. It is about optimizing outcomes in complex, high-stakes scenarios. Below are seven common misunderstandings that merit a second look.
Life Insurance Is Only for Income Replacement
Income replacement is a traditional use of life insurance, often relevant for younger families with dependents. However, for affluent individuals, its value lies in supporting broader planning objectives. It can supply liquidity to pay estate taxes or settle debts, reducing the risk of liquidating long-term or illiquid holdings under unfavorable conditions. It also facilitates funding for trusts, charitable initiatives, or succession planning. In this way, life insurance becomes a structural tool rather than a personal safeguard.
Being Self-Insured Eliminates the Need for Coverage
Having sufficient assets does not eliminate planning challenges related to timing, taxation, or asset disposition. A taxable estate, for example, may require liquidity that is not readily available without incurring market losses, triggering capital gains, or compromising a long-term investment strategy. Life insurance can create dedicated liquidity outside of the estate, allowing for more orderly and tax-conscious decision making. This enhances flexibility for heirs and preserves options that might otherwise be constrained by timing or valuation pressures.
Premiums Are Too High to Justify the Expense
While the premiums for permanent insurance can be substantial, the cost should be evaluated in the context of what the policy enables. Life insurance provides a non-correlated source of liquidity that can serve as a dedicated funding mechanism for estate obligations. When compared to other liquidity solutions—such as selling investments or borrowing against them—the predictability and tax characteristics of insurance proceeds can make it an efficient tool in the right circumstances. It is not appropriate in every case, but dismissing it on the basis of cost alone overlooks its strategic role.
Estate Planning Documents Alone Are Sufficient
Trusts, wills, and other estate documents provide the roadmap for wealth transfer, but they do not generate liquidity. For estates subject to federal or state taxation, liquidity must come from somewhere. Without sufficient planning, heirs may be forced to sell assets, sometimes quickly or under poor market conditions. Life insurance can serve as a reliable funding source to meet these obligations without disrupting the long-term vision for the estate. It supports the execution of the plan, rather than altering or complicating it.
Life Insurance Is Irrelevant Unless Death Occurs Early
While the timing of death may affect the policy’s internal economics, the primary reason high-net-worth individuals incorporate life insurance into their plans is not tied to lifespan—it is about control. By creating a predictable, purpose-built funding source, life insurance reduces dependency on other assets and supports planning strategies that are sensitive to timing and liquidity. Its value lies in how it complements the rest of the portfolio, regardless of when it is ultimately used.
Charitable Giving Eliminates the Need for Life Insurance
Many clients support philanthropic causes through direct giving, charitable trusts, or foundations. These strategies are often effective on their own. However, life insurance can enhance charitable intent by leveraging premium dollars to create a larger end benefit. It can also allow clients to direct other assets toward family or business goals while still maintaining a significant charitable legacy. Life insurance does not replace philanthropy; it offers a planning mechanism to amplify it, particularly when coordinated with other estate tools.
Life Insurance Is Too Complex to Be Worthwhile
Planning for high-net-worth families is inherently complex, involving overlapping considerations in tax, legal, and family dynamics. Life insurance introduces additional variables—policy design, ownership structure, trust coordination—but this complexity is manageable with the right team. Sophisticated solutions require thoughtful implementation, and insurance is no exception. With proper planning, it can serve as a straightforward tool with clearly defined outcomes. Complexity alone is not a reason to avoid it; rather, it is a signal to work with advisors who can navigate the details.
A Disciplined Approach to Insurance Planning
At Granite Harbor Advisors, we do not advocate for life insurance as a default recommendation. It is considered only when it serves a clear and necessary role within a client’s broader financial plan. In our experience, insurance is significantly more effective when used deliberately structured to support estate liquidity, legacy goals, or tax management in ways other assets cannot.
The decision to include life insurance should be grounded in analysis, not assumption. For many, the question is not whether they can afford to be without it—but whether their goals can be achieved more effectively with it.