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Penny Gusner Consumer Analyst

The high earner's approach to life insurance

If you're wealthy, and your family is accustomed to living off your high earnings, life insurance is a natural need, says Marv Feldman, president and CEO of Life Happens.

How much and what type of life insurance you need can vary depending on your income, assets and debt -- current and future. When determining how much life insurance you need, everyone, regardless of wealth, starts at the same place: examining their insurance needs. "You need to sit down with your financial advisors and ask a lot of open-ended questions," says Feldman.

Feldman recommends evaluating at minimum:

  1. What do you owe now and what will you owe in the future?

  2. Who do you want to protect?

  3. How much income do you want your family to have down the road?

  4. What are your future earnings likely to be?

  5. Do you have children who will be heading to college or graduate school soon or some day?

Your answers will determine what life insurance quotes you need to get from life insurance companies. An online life insurance calculator is an excellent starting point to help you estimate how much you need. Obtaining multiple quotes can give you a good idea of what kind of financial obligation you're looking at, and reviewing those quotes with professionals can give you great peace of mind.

Consider when life insurance proceeds might be needed

High-net-worth individuals may be able to self-insure some of their family's financial obligations, but they also may need life insurance to be sure their families can meet these obligations without having to sell assets, Feldman says.

Proceeds from life insurance also can be used to pay funeral expenses (the casket alone can cost as much as $10,000, according to the Federal Trade Commission) and estate taxes. In 2015 and 2016, your survivors may not owe federal taxes if your estate is worth less than about $5.4 million. However, depending on where you live, your survivors may owe taxes to the state. You likely want to have enough life insurance to cover whatever the tax burden might be so that your heirs don't have to sell assets to pay the state treasury, explains Feldman.

When mapping out what type of insurance to get, Feldman recommends using 20 years as a guide. If you want your life insurance to be there for your family until a certain time within the next 20 years, you can get by with term life insurance, which has lower premiums than permanent insurance, he says. Term insurance is what it says: it is for a fixed length of time.

However, if you expect your survivors may need the proceeds more than 20 years from now, you should consider permanent life insurance, either whole life or universal life. Permanent insurance offers lifelong protection.

Another advantage to permanent life insurance is that you can accumulate cash value on a tax-deferred basis and that cash can be used for a variety of purposes, including supplementing your retirement income. The initial premiums for permanent life insurance rates will be higher than what you would pay for a term policy of the same amount, according to Feldman.

Special circumstances for high earners to consider

Some high earners may have special circumstances to consider when selecting the right life insurance type and amount for them. Here's Feldman's advice:

  • Do you expect a large inheritance? Do you even need life insurance? The answer depends on when that inheritance will actually come in, Feldman says. "If that inheritance is going to come in 30 years and the individual earning income dies in only 10, what would your survivors do for that 20-year interim?" Let professionals help you determine where an expected inheritance fits into your financial plan and life insurance needs.

  • Do you need to buy a second policy to supplement an existing life insurance policy with low limits? If you weren't earning the high income you are now, your previous policy will likely no longer suit your needs.

  • Do you have a child with special needs? You should consider the likely life expectancy of you and your child. If your child is likely to outlive you but will need care, life insurance is a good way to know your child's needs will be met in the event of your death.

  • Do you and your partner/spouse both earn high incomes? You must decide: Is the surviving spouse going to continue to work and make seven figures? Will that one salary be sufficient to maintain the survivor's lifestyle? Couples with super high incomes tend to have a lot of discretionary income left at the end of the day, and if that's the case, you may not need extra life insurance, Feldman says. However, if one partner/spouse has to stop working to care for small children or for some other reason after the death, life insurance can be a good backup.

  • Does your home have a huge mortgage? You might want life insurance should something happen to you before you are able to pay it off, Feldman says.

Life insurance protects family business

Can scheming relatives steal your life insurance benefits?

If you're involved in a family business, life insurance can have a place in succession planning. Many times, the business is started by the parents, and then the second and third generations come in, observes Feldman. The parents built relationships with their bankers, and those same bankers may not look upon the new leaders of the business as favorably as they did the company's founders, Feldman says. If that's the case, it's a great reason to have life insurance and not be dependent on what the banks do in terms of financing. In this scenario, Feldman suggests obtaining permanent life insurance rather than term insurance.

Feldman indicates that another good reason for high-income earners to have some life insurance is when they are in professions in which they could be sued, such as medicine or law. In most states, the owner of the policy, which may or may not be the insured, is protected from the claims of creditors. Note: To be protected from creditors, the death benefit has to be paid to a trust with a third-party trustee. "Then this money becomes protected from in-laws, outlaws and creditors," Feldman says.

High-income earners have a lot to evaluate when considering what kind of life insurance best suits their needs. Learn about, save time on, and come out ahead of the process by using the host of tools available at Insure.com.

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