For high-net-worth families, estate planning often involves a challenge that is easy to overlook: substantial wealth does not necessarily mean substantial liquidity. A family may own a successful business, valuable real estate, investment assets, or other appreciating property while having relatively little cash available to meet estate taxes and other obligations at death.
Life insurance can help address that imbalance. When properly designed and coordinated with the broader estate plan, life insurance can create liquidity when it is needed, help preserve assets that a family does not want to sell, equalize inheritances among beneficiaries, and support the transfer of wealth to future generations.
But life insurance should not be the starting point. The starting point is understanding the estate itself: how assets are owned, how they may grow, what future tax exposure may look like, how much liquidity is already available, and what the family ultimately wants to preserve or transfer.
Only after those questions are addressed can families determine what role life insurance should play—and how the coverage should be owned, funded, and maintained over time.
Why High-Net-Worth Families Use Life Insurance in Estate Planning
Life insurance serves a different purpose in a high-net-worth estate plan than it does in traditional family protection planning. Rather than simply replacing income, coverage may be designed to create liquidity at a specific point in the future.
This can be particularly important when a family's wealth is concentrated in assets that cannot easily be converted to cash. A closely held business, commercial real estate portfolio, family property, or concentrated investment position may represent significant value, but those assets may be difficult or undesirable to sell when estate obligations come due.
Life insurance can create a pool of liquidity independent of those assets. Depending on the family's objectives, that liquidity may be used to help:
- Pay estate taxes and other settlement costs without forcing the sale of illiquid assets.
- Preserve a privately held business or real estate portfolio for the next generation.
- Equalize inheritances when certain assets will pass to some beneficiaries but not others.
- Provide liquidity for trusts or other wealth-transfer strategies.
- Support business succession and continuity planning.
The appropriate amount and structure of coverage depends on the estate. Life insurance is most effective when it is designed around a clearly identified planning need rather than treated as a standalone financial product.
Creating Liquidity for Estate Taxes and Expenses
Estate taxes can create a significant liquidity challenge because federal estate tax is generally due within nine months of death. The value of an estate may be substantial, but that does not mean the executor or heirs will have sufficient cash available when the tax is due.
For families whose wealth is concentrated in real estate, privately held businesses, or other illiquid assets, generating cash quickly can require selling assets at an unfavorable time, borrowing against them, or disrupting a long-term ownership strategy.
That is why the amount of life insurance needed for estate planning should not simply be based on today's net worth or today's estate tax exemption. A more thoughtful analysis projects how the estate may grow over time, estimates potential future estate tax exposure, identifies liquid assets that could realistically be available, and measures the resulting liquidity gap.
Life insurance can then be evaluated as one potential source of predictable liquidity to help close that gap. The objective is not simply to create a larger estate. It is to give the family options—so that tax deadlines do not determine which assets must be sold or how the estate is ultimately transferred.
For families with significant illiquid or appreciating assets, estate liquidity planning can help identify and model this potential gap before determining how much life insurance may be appropriate.
Keeping Life Insurance Outside the Taxable Estate
Purchasing the right amount of life insurance is only part of the planning process. How the policy is owned can also affect the estate plan.
If an insured owns a life insurance policy at death, the death benefit may be included in the insured's gross estate for federal estate tax purposes. For families with potential estate tax exposure, this can undermine part of the reason the coverage was purchased in the first place: creating liquidity outside the taxable estate.
One strategy commonly used to address this issue is an irrevocable life insurance trust (ILIT). When properly structured, an ILIT can own life insurance outside the insured's estate and receive the policy proceeds for the benefit of the trust beneficiaries.
The trustee can then administer those proceeds according to the terms of the trust. Depending on the estate plan, liquidity may be available to purchase assets from the estate, lend money to the estate, or ultimately provide benefits to family members and other trust beneficiaries.
ILIT planning requires coordination among the family's estate planning attorney, insurance advisor, trustee, and other professionals. Trust ownership, beneficiary provisions, premium funding, policy administration, and existing policies can all affect the outcome.
Using Life Insurance to Equalize an Inheritance
Estate planning becomes more complicated when a family's assets are valuable but difficult to divide. A privately held business, family property, commercial real estate, or other concentrated asset may be intended for one beneficiary even though the family wants to provide comparable value to others.
Consider a parent who owns a valuable family property and has three children. One child wants to retain the property, while the other two would prefer to receive liquid assets. Dividing the property equally could force a future sale or require the child who wants to keep it to purchase the interests of the other siblings.
Life insurance can provide another source of value. With proper planning, the property may pass to the child who wants to retain it while the other beneficiaries receive life insurance proceeds or other liquid assets.
The objective does not necessarily have to be a mathematically equal inheritance. Instead, life insurance can give families greater flexibility when deciding how different assets should pass to different beneficiaries without forcing illiquid assets to be divided or sold.
How Much Life Insurance Does an Estate Need?
There is no standard amount of life insurance that a high-net-worth family should own. The appropriate amount depends on the specific obligations the family wants the coverage to address and the resources that are expected to be available when liquidity is needed.
For estate planning purposes, the analysis may include:
- The projected future value of the estate.
- Potential federal and state estate tax exposure.
- Existing cash and other liquid assets.
- Outstanding debt and other estate obligations.
- The value of businesses, real estate, or other assets the family wants to preserve.
- Existing life insurance and other sources of liquidity.
- Inheritance equalization or other legacy objectives.
The analysis should also look forward rather than simply measure today's estate. Businesses and real estate may appreciate substantially over a family's lifetime, potentially increasing future liquidity needs even when the current estate appears adequately funded.
For that reason, determining the appropriate amount of coverage is an ongoing planning exercise. Estate values, tax laws, family objectives, and existing liquidity can all change. The amount of life insurance that appears appropriate today may need to be reevaluated as the estate evolves.
Choosing the Right Life Insurance Structure
Estate planning often creates a long-term or permanent need for life insurance, but there is no single policy type that is appropriate for every high-net-worth family. The design should reflect what the coverage is expected to accomplish and how much certainty, flexibility, and risk the family is willing to accept.
Important considerations can include the duration of the need, guarantees, premium flexibility, cash value objectives, assumptions about future policy performance, and the family's ability to support the policy if those assumptions change.
For estate liquidity planning, the durability of the death benefit is particularly important. A policy designed to provide liquidity decades in the future needs to be evaluated not only on its initial premium, but also on the likelihood that the coverage will remain in force when the family ultimately needs it.
This is why policy selection should follow the planning analysis rather than drive it. Once the amount, purpose, ownership, and expected duration of the coverage are understood, different policy structures can be evaluated against those objectives.
Individual vs. Survivorship Life Insurance
Another important design decision is whether the planning objective calls for coverage on one individual or a survivorship policy covering two people.
An individual life insurance policy pays a death benefit when the insured dies. This may be appropriate when liquidity is needed at the first death, when coverage is tied to a specific individual's estate or business interests, or when the planning objectives of each spouse are different.
Survivorship life insurance, sometimes called second-to-die coverage, insures two people and generally pays the death benefit after the second insured dies. Because federal estate tax for a married couple is often a concern at the second death, survivorship coverage can be particularly useful in estate liquidity and multigenerational wealth-transfer planning.
The appropriate structure depends on factors such as the timing of the liquidity need, estate ownership, family circumstances, insurability, policy economics, and the broader trust and estate plan. In some cases, families may use more than one policy or combine individual and survivorship coverage to address different objectives.
Funding Large Life Insurance Premiums
Once a family determines the appropriate amount and structure of life insurance, the next consideration is how the premiums will be funded. For substantial amounts of coverage, that decision can have meaningful implications for cash flow, liquidity, gifting, and the family's broader balance sheet.
Some families fund premiums directly using available cash flow or liquid assets. When a trust owns the policy, premiums may also be supported through gifts or other transfers made as part of the family's estate planning strategy.
For families whose wealth is concentrated in businesses, real estate, or other illiquid assets, however, paying large premiums from existing assets may create a different problem. Selling appreciated assets or redirecting capital away from productive investments may conflict with the family's broader objectives.
In appropriate circumstances, financing may be considered as an alternative funding strategy. This can include private lending arrangements or borrowing premiums from a third-party lender through life insurance premium financing.
Financing does not eliminate the cost or risk of life insurance. Interest rates, collateral requirements, policy performance, loan balances, and the eventual repayment strategy all need to be modeled and reviewed over time. The decision to finance should therefore be based on the family's overall planning objectives and financial position—not simply on the ability to borrow the premium.
Life Insurance for Business Owners and Concentrated Wealth
For business owners, estate planning and business planning are often closely connected. A privately held company may represent a significant portion of the owner's net worth while also being one of the least liquid assets in the estate.
This can create several challenges. The estate may need liquidity to pay taxes or other obligations, family members may have different levels of involvement in the business, and surviving owners or employees may need a clear path for maintaining continuity after an owner's death.
Life insurance can provide liquidity without requiring the business or other assets to be sold at an unfavorable time. Depending on the circumstances, coverage may also support a buy-sell agreement, help equalize inheritances between family members who will and will not receive business interests, or provide capital to support the transition of the company.
The key is to coordinate the business planning with the estate plan. Ownership of the policy, beneficiary designations, business valuation, trust planning, and the intended succession strategy should work together rather than being designed independently.
Life Insurance Requires Ongoing Review
Placing life insurance is not the end of the estate planning process. A policy designed years ago may no longer align with the estate it was intended to protect.
Businesses and real estate can appreciate, estate liquidity needs can increase, family objectives can change, and assumptions used when the policy was originally designed may not develop as expected. Changes in interest rates, policy expenses, crediting rates, or premium funding can also affect long-term policy performance.
Periodic life insurance policy reviews can help determine whether existing coverage remains appropriate for the family's current estate, liquidity needs, and planning objectives. A review may include evaluating policy performance, updated in-force projections, funding requirements, ownership and beneficiary structure, and whether the amount of coverage still aligns with the projected need.
For high-net-worth families, this review should also be coordinated with updates to the broader estate plan. The objective is not simply to determine whether a policy is still in force, but whether it is still capable of doing the job it was originally designed to do.
Building Life Insurance Into the Broader Estate Plan
For high-net-worth families, life insurance can solve problems that investment assets alone may not solve efficiently. It can create liquidity at a specific point in time, help preserve businesses and real estate, provide flexibility when dividing assets among beneficiaries, and support long-term wealth-transfer strategies.
But the effectiveness of the strategy depends on more than purchasing a policy. The amount of coverage, policy design, ownership structure, premium funding, and ongoing management all need to be coordinated with the family's estate plan and long-term objectives.
The process should therefore begin with the estate—not the insurance. By understanding projected estate growth, potential tax exposure, available liquidity, and the assets a family wants to preserve, life insurance can be evaluated as one component of a broader planning strategy.
For families with significant estates, illiquid assets, or privately held businesses, Mericle & Company works collaboratively with clients and their legal, tax, and financial advisors to evaluate how life insurance may fit within the broader estate plan.
