Insurance for Your Wealth - Part 2
Marissa Mah, B.Comm., LL.B., LL.M. - Jul 10, 2023
Even the most successful individuals are vulnerable to unexpected events that can have devastating impacts on their financial well-being. In Part 2, we elaborate on why having robust insurance coverage is important for high-income earners
In our last Mah Mail, we began to explore the topic of insurance, and we elaborated upon several types of insurance that are relevant to individuals that earn a high income.
As we noted, achieving a high-income level is often a risky endeavour. It usually takes years of hard work, sacrifice, and a considerable amount of up-front cost – all with no guarantee of success. And even when one does achieve the sought-after hefty pay cheques, risks do not disappear. Indeed, even the most successful individuals are vulnerable to unexpected events that can have devastating impacts on their financial well-being.
In part 2 of this Mah Mail, we elaborate on why having robust insurance coverage is especially important for high-income earners.
Why is insurance important for high-income earners?
While most people would be wise to consider their potential need for insurance, high-income individuals are particularly vulnerable to the possibility of sudden financial loss. In short: the higher one soars, the further one can fall. High-income earners have a lot to potentially lose. This is especially true for individuals who are still early in their career and have yet to build enough wealth to support their standard of living if their ability to make money were to suddenly vanish.
High-income individuals may have higher expenses in the form of larger mortgages, multiple vehicles, and more costly lifestyles (e.g., luxury vacations, social club memberships, fine dining, full-time childcare services, etc.). The consequences of a sudden financial loss can be devastating for someone in this situation: it would either necessitate a drastic change in the way they and their family live, or it may lead to the accumulation of significant debt in order to maintain the stability of the life they worked so hard to secure. Therefore, having insurance to account for these expenses in the case of unexpected illness, disability or death is of utmost importance.
However, in addition to considering the need to pay for ongoing expenses, it is also incredibly important to understand that a high-income earner’s most valuable asset is arguably not what they own now, but what they can build in the future. Indeed, one of the most important reasons for high-income earners – and especially those early in their careers – to have comprehensive insurance is to protect their future earning potential. For instance, imagine someone making $200,000 a year, starting at age 30. If we assume that this individual will work for at least another 30 years, they and their family stand to lose $6,000,000 (SIX MILLION!) in earnings if they become disabled and unable to work, or if they die unexpectedly. And this figure doesn’t even account for the potential additional millions that could have been earned from investing part of that yearly income over this time span. Thus, having comprehensive insurance to protect against these types of terrible outcomes is not just to protect one’s current life – it is also to protect the wealth and legacy that one would have built in the future.
Life insurance as a tax-efficient vessel for passing forward your legacy
Another incredibly important consideration for determining how to best use insurance as a high-income earner relates to taxes.
As the saying goes, there are only two guarantees in life: death and taxes.
When a high-income individual passes away, it is usually true that a significant portion of their hard-earned wealth will be lost to estate or other taxes. This means that their ability to pass forward their wealth onto others – such as their children, friends, or beloved charities – is notably diminished.
However, the payout from a life insurance policy is not treated the same way as other asset classes when it comes to calculating taxes.
The money paid to the beneficiaries of one’s life insurance policy is transferred on a tax-free basis. That is, the entirety of the payout goes directly to the chosen beneficiary (i.e., a spouse, child, friend, charitable organization, etc.) WITHOUT being subject to taxation.
Therefore, high-income individuals might consider placing a proportion of their wealth into a robust life insurance policy to reduce the amount of money paid as tax upon their passing (e.g., by having $1 million dollars in an insurance policy, the payout of those funds will not be subject to taxes upon your passing).
Furthermore, high income individuals that are also business owners have additional opportunities to transfer wealth by way of an insurance policy paid for by corporate funds. This not only facilitates a transfer of wealth, but it can also allow your family to exit the business without causing the company financial strain.
Of course, large insurance policies come with a similarly large capital investment, so determining whether or not this strategy would actually benefit an individual in the long-run requires a careful consideration of their overall estate planning strategy.
Taking action to protect your future
As we can see, insurance is an important aspect of a comprehensive financial plan for high-income individuals. Unfortunately, many people hold common misconceptions about insurance that prevent them from taking advantage of its benefits. For example, some believe that they are too young or too healthy to need insurance, while others believe that insurance is too expensive. These myths can be significantly detrimental to a person’s financial stability, as insurance is most valuable when purchased early and before it is needed. Indeed, the reality is that the cost of purchasing insurance increases as one ages, and the occurrence of an unexpected illness or new health condition can significantly raise its price or even potentially prevent a person from qualifying for a policy at all. Therefore, it is best to purchase insurance when one is young and healthy – or in other words, at the beginning of a high-earning career.
However, it is certainly understandable if this all feels overwhelming – determining what insurance is right for you is not always a straightforward task. It depends on your own individual needs and risks.
One of the best ways to figure this out is to work with an experienced insurance advisor that can help simplify the process and customize available options towards your unique life circumstances. When paired with a trusted investment advisor, you can establish a team of financial experts whose primary goal is ensuring that you can continue to build – and secure – your future wealth.
If you are ready to take action on this, or even if you just want to start exploring possibilities, we would be delighted to speak with you about developing a plan to ensure that your hard work, sacrifice, and wealth will be well protected.
You can also check out these articles to learn more:
- Protecting Your Wealth discusses several considerations to help safeguard and enhance your wealth.
- Planned Giving – Optimize Your Gifting Strategy With Insurance discusses several strategies for maximizing your charitable donations using insurance.
- Insurance Considerations for Individuals explains the types of insurance coverage available to help individuals safeguard themselves, their family and their wealth.
- Insurance Considerations for Business Owners & Incorporated Professionals explores insurance strategies that can supplement a business owner’s retirement savings, and help to protect your business and maximize the value of your estate.