Liquidity, Liquidity, Liquidity!
By: Richard S. Bernstein, Amb. Robin Bernstein(ret.) and Arthur L. Bernstein
Even billionaires need insurance policies (79 Florida Billionaires are among the World’s Richest: Forbes 2024 List) to protect their vast assets, massive homes, golf courses, businesses, and substantial liquidity needs.
The record for the world’s most valuable insurance policy ever purchased is for $250 million dollars, bought by an unnamed customer of HSBC Life in Hong Kong as published by the Guinness Book of Records on March 13th, 2024. The plan is designed to preserve the individual’s wealth for future generations of their family. The previous record was a $201 million purchase by an unnamed Silicon Valley Billionaire (USA) in 2014. The amount of the policy necessitated it being underwritten by 19 different insurers.
It may be puzzling why an uberwealthy individual would buy a life insurance policy of that size. Wouldn’t their heirs have enough money? We understand the strategy since we sold the first $100 million plus life insurance policy in Florida over a decade ago. It’s simple – estate planning and taxes.
Additionally, if the Federal Government eliminates the estate tax, the states may see it as an opportunity to implement their own state-level estate tax.
Many wealthy individuals have been securing untaxable loans to take advantage of low-interest rates before they rise any further. These loans are due immediately and will be repaid upon the borrower’s death. An untimely death can force the purchaser’s estate to liquidate assets at an inopportune time to raise enough money to pay off leveraged loans, business expenses, and other debts, including income and estate taxes. Federal taxes may eat up to 45 percent of an heir’s inheritance. Also, most wealthy individuals have their estates tied up in hard assets and may need more liquidity to pay such a large tax bill. Life insurance can provide the money to pay off tax obligations rather than liquidating more valuable growth and income-producing assets.
Frequently, when talking about life insurance benefits for entrepreneurs and businesses, we share stories of famous brands that were started or saved by life insurance. After failing to secure financing for the building of his dream amusement park, Disneyland, Walt Disney collaterally borrowed a large part of it from his cash value life insurance policy. Entrepreneur Ray Kroc, the founder of McDonald’s, borrowed money from two of his cash value life insurance policies to help overcome cash flow problems, pay his employees, and start his Ronald McDonald advertising campaign.
Yes, the ultra-wealthy indeed purchase vast amounts of life insurance, but it’s not billionaires who buy the most. You might be surprised to learn that the most prominent buyers are banks and large corporations. Many banks often make insurance a significant percentage of their “top tier” capital and rely on it to withstand financial turbulence. Top life insurance companies, despite economic turmoil, have maintained top-tier ratings, such as MassMutual, always paying death benefits since 1851. In short, insurance policies offered by major life insurance companies have been a good, safe investment when backed by the general account of the life insurance company and protected by state guarantee funds (which vary by city and state).
Planning is key to maintaining prominence in the ever-changing financial and legislative environment. When considering any sophisticated planning concepts, seek the help of qualified tax attorneys, CPAs, and insurance advisors. Properly structured, these strategies can go a long way toward maintaining your family’s lifestyle for generations. Let us put our years of expertise, knowledge, and experience to work for you. Call our experienced advisors at 561.689.1111 (Richard’s Private Line) for your confidential consultation.
