3 Reasons Rich People Buy Life Insurance

You may be surprised to find life insurance is still important even for people with plenty of money.

Most people buy life insurance because they don't want their loved ones to struggle financially in the event of their untimely death.

For example, if a person's spouse counts on their income to pay the mortgage or if a stay-at-home-parent provides valuable childcare services that would otherwise have to be paid for, the loss of income or services could have devastating financial consequences.

But, there are some wealthy people who have plenty of assets in the bank, so the loss of their income wouldn't cause any immediate financial hardship for loved ones. Still, there are a few really good reasons why rich people buy life insurance even in these situations. Here are three of them.

1. To cover estate or inheritance taxes

Once an estate is large enough, estate or inheritance taxes could end up being triggered. Estate taxes can be charged by the federal government or by state governments and are paid out of the assets in the estate. Inheritance taxes are assessed by a small minority of states and are paid by those who inherit wealth.

In some cases, it could become a hardship for these taxes to be paid. For example, if most of the wealth a person is leaving behind is tied up in a valuable family farm or other property, there may not be enough cash available to pay the taxes without selling assets.

In these circumstances, a large life insurance policy could provide money to pay the taxes. This could keep the estate intact, so heirs don't have to sell the items they receive upon a death just to fulfill their IRS or state tax obligations.

2. To buy out business interests

Many rich people own an interest in a business, which has substantial value. They may have partners or co-owners in that business. If so, upon their death, a tricky situation is created.

The surviving family members may want their share of the business' value or assets but may not actually want to be involved in running the business. Or the surviving co-owners may not want the deceased person's family to be involved.

In these situations, it can make sense for a wealthy person to buy a life insurance policy and name business partners or co-owners as the beneficiaries. Upon the death of the wealthy business owner, the policy will pay out to the partners who can use the proceeds to purchase the deceased person's share of the company from surviving family members.

This is a win/win since the family gets the money, and the remaining business owners can retain complete control over the company without having to work with family members of the deceased.

3. To pass assets tax free

Life insurance proceeds can be delivered tax-free to beneficiaries. This allows wealthy people to buy a life insurance policy with a large benefit and leave their loved ones with this money that isn't subject to estate or inheritance tax.

All of these benefits may not apply to everyday people who just buy insurance, so their loved ones don't face hardship. But some of them, such as the tax-free death benefits, are an advantage for everyone. And they show just how many different types of situations necessitate the purchase of life insurance coverage.