When High-Net-Worth Clients Say They Don’t Need Life Insurance

Key Takeaways

• In my experience, high-net-worth clients who say they don’t need life insurance often reconsider once it’s introduced as a tax and legacy planning vehicle rather than a protection product.
• The SECURE Act made inherited IRAs less tax-efficient for many beneficiaries, making permanent life insurance a compelling alternative for legacy planning.
• How a policy is structured determines whether it can deliver as a legacy tool, an accumulation vehicle, or both.

I never thought life insurance would become my passion. But that’s what life experience does.

I lost my father at an early age. He had no insurance, no plan. Growing up with that reality shaped how I thought about money long before I became an advisor.

Then came September 11, 2001. I was in the North Tower twice a week meeting with clients at Cantor Fitzgerald. I was supposed to be there the morning the towers fell. I wasn’t.

Over the following year and a half, I attended funerals, delivered death claims, and sat across from families whose lives had just changed irreversibly. I paid out more than $30 million in life insurance benefits during that period. Some of those families had planned. Some had not. The difference was not subtle.

What I saw in those families stayed with me. The ones who planned had more than coverage. They had a plan that accounted for what their wealth was worth to the people who would inherit it, and what it would cost them to receive it. That distinction matters more than many advisors and clients realize, and it shows up in portfolios every day in ways that are easy to miss.

Why the IRA May Not Be the Legacy Asset Your Clients Think It Is

One of the most common gaps in high-net-worth client portfolios is the IRA. A large retirement account built carefully over decades often sits at the center of an estate plan, earmarked as a legacy asset for children or grandchildren. On paper, it looks like the right vehicle for the job.

But the SECURE Act changed the math on that assumption. For many non-spouse beneficiaries, the 10-year rule now requires the full inherited IRA balance to be distributed within a decade of the original owner’s death. What’s more, under the final regulations effective in 2025, beneficiaries of owners who died on or after their required beginning date also must take annual distributions in years one through nine, not just empty the account by year ten.

The real problem emerges when you consider who is on the other end of that distribution. For clients whose children are in their peak earning years when they inherit, those forced distributions land on top of existing income, often pushing them into higher brackets at the least optimal time. The account the client spent a lifetime building can get compressed into a 10-year tax event for the people they were trying to protect.

The IRA that looks like a gift can function more like a tax bill with a 10-year fuse.

As Ed Slott argues in The Retirement Savings Time Bomb Ticks Louder, clients with large pre-tax balances they do not expect to spend may need to replace the IRA as their primary legacy vehicle.

Example: To net $2 million from a taxable IRA, a client may need to preserve $3 million or more in their estate, depending on the beneficiary’s tax situation. A properly structured permanent life insurance policy can be designed to provide that same $2 million death benefit tax-free for significantly less capital preserved in the estate.

Once the legacy goal is secured through a lower-cost vehicle, the client has permission to spend the rest. The assets they were preserving for an inheritance are now free to support their life in retirement. We call this the “permission slip,” and it can shift the entire tone of the retirement income conversation.

Related: Three Hidden Tax Problems in Your Clients’ Traditional IRAs

How to Open the Life Insurance Conversation Without Losing the Audience

The challenge is that many advisors lead with the words “life insurance” and lose the room before the argument is made.

One approach that tends to work is leading with taxes instead.

When I sit down with a client who has considerable assets and no life insurance, I rarely say the words “life insurance” at all. Instead, I describe an investment that works like this:

• Fund it flexibly, within the policy’s contribution limits
• Have anyone manage the money
• Access cash value under the policy’s terms without penalties or RMD rules
• Receive some asset and creditor protection depending on state law
• Never pay income tax on the growth over the next 10, 20, 30, or 40 years
• Pass it to heirs with reduced or no estate taxes, if structured properly

The response is often the same, and positive. People say they would want to put as much into something like that as possible. Then I tell them: that investment does not exist in perfect form. But there is something that comes close. And what I have just described is how permanent life insurance functions when properly designed. The caveats live in the policy terms, the funding limits, and who owns the contract.

Related: Midyear Tax Planning: What Top Advisors Do Differently

How to Structure the Policy So It Delivers

Once a client is open to the conversation, structuring the policy correctly is what determines the outcome. A frequent mistake advisors make is treating permanent life insurance as a single product that does multiple things. It can, technically. The trade-off is that when you try to optimize both the death benefit and the cash value accumulation in the same policy, you often do neither well.

I think about every case through two strategy lenses: the love strategy and greed strategy.

A love strategy is designed around the death benefit. The goal is the most insurance for the least amount of money over the client’s lifetime, optimizing the return on the death benefit for the people they want to protect. This is legacy planning at its most direct.

A greed strategy is designed around accumulation. The goal is tax-free growth, flexible access, and keeping as much of the premium working inside the policy as possible. Permanent life insurance is among the few assets that can be both income tax-free and, when owned outside the estate, estate tax-free. That is why the greed strategy competes with a taxable brokerage account on an after-tax basis. With low annual fee drag, a well-designed policy can reduce the IRS’s share of a client’s long-term growth. When compared to a taxable brokerage account, where a hypothetical 8% gross return can net materially less after taxes depending on turnover and the client’s bracket, the difference over a client’s lifetime can be meaningful.

Both are effective strategies. They require different structures, different product types, and different conversations. When an advisor approaches the planning conversation intentionally and asks the right questions, the right strategy for the client becomes much clearer.

Related: Five Impactful Life Insurance Strategies and Insights for Financial Advisors

Where Life Insurance Belongs in a Holistic Wealth Plan

Life insurance belongs inside the plan, built in from the start. At Prosperity Capital Advisors, we organize every client’s financial life across three time-based buckets using The Bucket Plan® framework: money needed now, money needed soon, and money needed later. Permanent life insurance, depending on how it is structured, has a role in each one.

A love strategy funds legacy goals in the Later Bucket, so the rest of the plan can focus on income and growth without the weight of an inheritance obligation sitting on top of it.

A greed strategy serves as a tax-free accumulation vehicle alongside qualified accounts, particularly for clients who have exhausted other options.

For clients doing Roth conversions, life insurance can serve as the liquidity layer: beneficiaries have immediate access to tax-free cash from the death benefit while Roth accounts continue to grow under the 10-year rule, a flexibility that Roth conversions alone cannot provide.

When life insurance is framed as an integral part of the original plan rather than an additional product, clients can see its value. It is part of how their full financial picture holds together.

Related: Inside The Bucket Plan®

Get Support Bringing Life Insurance Into Your Practice

Prosperity Capital Advisors helps advisors at every stage of their practice integrate life insurance into holistic wealth plans. If you want to explore what that looks like for your practice, book a call with our team.

Frequently Asked Questions About Life Insurance as a Planning Asset

Can life insurance replace an IRA for estate planning?

For many HNW clients, yes, and often more efficiently than they expect. The conversation tends to work best when an advisor asks what the client’s plan is. Specifically: what asset are they planning to leave their family, and how much does that asset need to be worth before taxes for the beneficiary to net what the client intends? Once clients work through that question, the case for life insurance often becomes clear on its own.

How is permanent life insurance different from term life insurance?

Term insurance is designed to provide a death benefit for a defined period at a relatively low cost. Permanent life insurance is a different tool with a different structure and a different purpose. The confusion between them is one of the primary reasons the asset class is underutilized. Framing permanent life insurance as a tax planning vehicle rather than a version of term often resolves the comparison quickly.

Does life insurance make sense for clients who are already doing Roth conversions?

Often yes, and for complementary reasons. Roth conversions address the tax problem inside the estate. Life insurance addresses the liquidity and legacy problem outside it. For beneficiaries, inheriting a combination of Roth accounts and a tax-free death benefit gives them flexibility that either tool alone does not provide.

What should I look for when reviewing a client’s existing life insurance policy?

Existing policies are worth reviewing for fee structure, current performance relative to original projections, and whether the design still matches the client’s goals. Policies sold years ago with high expense loads or that are not performing as originally illustrated may benefit from restructuring or replacement. In our experience, significant cost variance can exist across policies that look similar on the surface, and that variance has a real impact on long-term Internal Rate of Return (IRR).

Learn More About Life Insurance as a Planning Asset

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For Financial Professional Use Only. This information is for educational purposes and is not intended as individual investment, tax, or legal advice.