Jordan Sprechman

Practice Lead, U.S. Wealth Advisory


Those who have significant wealth, and financial wisdom, often use life insurance for so much more than merely to replace income. They use it to create liquidity to pay estate taxes, leave a legacy, transfer wealth tax-efficiently, ensure that a business succession plan succeeds and more. 

Yet many people shy away from incorporating life insurance into their financial plans, occasionally to their – and their families’ – later regret. And that is just one of the mistakes we see people make with their insurance coverage. We also see some fail to purchase coverage adequate for their needs, name the wrong owner for the policy, neglect to integrate their life insurance into the rest of their financial planning and forget to keep policies up to date.

It’s easy to see why so many people avoid even thinking about life insurance: It forces us to contemplate our mortality or that of loved ones. It also can be difficult for anyone who is not in finance or the life insurance business to fully understand the economic features of policies (such as the differences among types, the significance of interest rates and the consequences of late or unmade premium payments). Typically, the wealthier an individual is, the more complicated the family’s finances and the greater the need for life insurance can be.

You don’t want to leave your family in the lurch, perhaps scrambling to pay the taxes due on your estate or being forced to sell the family business. And there are specialists to help you get it right. So here’s how to make sure you have adequate life insurance for your needs. The key: Avoid these four common mistakes.

1. Avoid determining your coverage amount solely based on what you might easily pay now.

We recommend working with your advisor to determine how much your beneficiaries will truly need, depending on the intention for your wealth, evolving needs and timing.

For example, they may need a certain amount to continue to live the lifestyles to which they are accustomed, or they may need to pay off a mortgage, finish schooling, maintain a family vacation home, offset estate taxes, make charitable donations or generate cash to continue running a business.

The exact amount needed can vary significantly depending on individual circumstances, but of course, the greater a net worth, the larger the policy size might be. 

2. Don’t pick the wrong owner for the policy.

If your policy has the wrong owner, your beneficiaries could end up with only about half of the amount you wanted them to have.

That’s possible because, while a life insurance policy’s death benefit passes generally free of income taxes to the beneficiary, it could be subject to estate taxes. If the insured is also the owner of the policy, on his or her death, the death benefit would be included in the insured’s estate, and therefore subject to U.S. estate tax of up to 40%. In addition, the death benefit could be subject to state estate taxes at rates of roughly 10% – for an all-in estate tax burden of 50% or more.

Our thoughts: Consider making an irrevocable trust the owner of the policy. Typically, the insured establishes the trust, then transfers cash equal to the annual life insurance premiums into it. 

3. Don’t fail to consider your policy’s investments as part of your family’s overall financial plan.

A permanent insurance policy often has fairly well-defined return and risk features that can be evaluated as part of a family’s overall balance sheet. Also, the policy’s owner can borrow against the policy as needed and exercise other ownership rights (such as changing beneficiaries) granted under the terms of the insurance contract.

Our thoughts: Because permanent policies often include an investment component, they should be included as part of your family’s overall asset allocation and reviewed on a regular basis to ensure that your allocation continues to align with your goals. 

For instance, if an elderly family member is the insured of a policy that has a sizeable death benefit, the family might want relatively more of the family’s assets invested in equities, rather than bonds. That’s because of the high likelihood that the family will have a significant influx of cash on the client’s passing. The cash could supply sufficient ballast to the family’s overall portfolio.

4. Don’t forget to review your policy regularly to keep it up to date.

Just as market conditions can affect your investments, macroeconomic and interest rate environments can affect permanent life insurance cash values, possibly leading to a different outcome than you might have expected. These surprises are more likely to happen if you borrow against the policy’s cash value or take distributions from it.

Many insurance contracts provide that if a certain dollar amount in premiums is paid over a certain number of years, a certain death benefit would be paid on the death of the insured.  However, that death benefit may differ from the illustrations you’ve been shown because those illustrations were based on assumptions about interest rates, and interest rates did something else. 

The financial strength of the insurance company behind your life insurance policy also can influence your policy’s outcome, especially if the return on your cash value “investment” is based on how well the company’s investments perform.

All these factors can cause fluctuations in the value of your life insurance policy. 

Our thoughts: Any sizeable policy should be evaluated at least annually as a matter of good financial hygiene.

We can help

Your J.P. Morgan advisor can help you assess how life insurance could fit into your estate and financial plan, guide you through selecting a term or whole life insurance policy that would meet your needs and those of your beneficiaries and conduct a policy review to ensure that it continues to align with your goals.

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Our Wealth Advisors begin by getting to know you personally. To get started, tell us about your needs and we’ll reach out to you.

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