Richie Rich can smoothly afford medical bills from his pocket. So, it is weird that the uber-rich class needs insurance. After all, they don't need to run on a monthly paycheck-to-paycheck cycle. In general, it is observed that insurance is the weapon to fight the out-of-pocket fear of the commoner.
The stunning fact is that 70% of wealthy Indians adopt life insurance as their most trusted investment destination, as per a survey quoted by the PTI news agency. A Silicon Valley billionaire purchased a $201 million insurance policy and enlisted in the Guinness Book Of World Records in 2014.
Reasons For Why Do The Rich People Buy Insurance
Relief from The Tax Trouble
Estate Distribution and Strategic Divorce Settlement
Easy Cashflow or Liquidity in The Tough Times
Liability and Debt Protection After Death
Asset Protection Tool
Risk Management Tool
Guaranteed Growth
Management Accountability Safety
Reasons For Why Do The Rich People Buy Insurance
The rich people are very keen on buying stuff and indulging in new investments. They invest in various things like stocks, real estate, crypto, private equity, and more to ensure that they remain rich. Another important thing that they tend to buy is insurance to ensure that their heirs can stay rich too. Thus, insurance is not a joke for the elite class, and never it can be. Here are the top 8 reasons why the rich people are keen on buying insurance:
Relief from The Tax Trouble
Many wealthy people have a lot of cash in the bank, so losing their income would not put their loved ones in a bad financial situation. There are a few compelling reasons why wealthy people purchase life insurance even in these circ*mstances. They used to go for insurance to maintain their 'tax health' rather than after-death benefits or pay medical bills.
If we take some examples in the US market, if the majority of the wealth is left behind by the deceased businessman, tied up with another firm, then there may not be sufficient tax to pay tax without selling the asset. A big life insurance policy could give money to pay the taxes in these circ*mstances. This security could preserve the estate intact, preventing heirs from having to sell goods they inherit to meet IRS (US federal tax body) or state tax responsibilities.
In the Indian market, if you buy an insurance policy, under Tax act 80C, the policyholder will get tax exemption on it up to a certain amount. NRI or foreigners can take advantage of investment in India. Act 80 D is there to cover your health insurance, mediclaim, or critical illness under the tax exemption system.
Estate Distribution and Strategic Divorce Settlement
Insurance is useful as an intangible asset for the rich during property resolution or estate distribution among inheritance—many next generations of high net worth individuals used to file court cases for unequal property settlement. Suppose the billionaire has two children, X and Y, where X had an interest in the family business, but Y made his cup of tea with Cricket. So the owner decides to hand over the main business to X and the remaining plot to son Y. However, the asset value shows discrimination where the whole life insurance can make the balance with cash value.
When a rich person goes for marital separation, sorting out life insurance is sometimes neglected among the clumsy tasks that come with a divorce. The instant liquidity of cash helps the spouse with alimony protection and secures the child's education because no one can predict the future and not even the ex-spouse, or the policyholder. The sudden demise of the owner or accidental fall of business may push the widow or ex-spouse into a lifetime struggle to get the shareholders' confidence.
Easy Cashflow or Liquidity in The Tough Times
Upon the death of the bread earner, families and dearest ones are provided financial safety and soundness through insurance, with less paperwork formality. When access to capital is vital for some businesses and life situations, there is hardly any investment tool that can offer such instant cash value. The legatees may need to seek court orders such as probate or succession certificate to claim assets after a decedent's death.
Assuming there is no dispute among legatees, still this may take up to a year, and in the event of a legal conflict, the wait could be even longer. The estate's assets are locked up and unavailable to your family in the interim. But with insurance, the family or successor can have financial support with less paperwork within a few weeks. So, another reason why the rich buy insurance is to take care of the members in case of an unpredictable death of the main bread earner.
For example- The recent struggle of the Cafe Coffee Day owner's widow to convince the investors despite having a nearly $1billion market value with 1600 outlets.
Liability and Debt Protection After Death
If we check broader prospects, the topmost rich people and their most valued Indian companies lost nearly $14 billion in market capital amid the pandemic of March 2021. Many Fortune India 500 listed companies also are struggling with $14 billion to $28 billion debt.
In general, an individual's liability can be recovered even after death. Under the law, the estate must first pay off all of the deceased's liabilities. There is a possibility that creditors will claim the insured's assets if the policyholder dies. Even the sum insured can be sought by creditors or attached by the court for debt repayment in this case if you purchase a life insurance policy under the Indian Married Women's Property Act of 1874 to prevent this. The procedure is identical to that of traditional life insurance. The only difference is that when filling out the policy proposal form, the applicant must pick Policy under MWP Act 1874.
Asset protection insurance refers to tactics to safeguard one's assets from unwelcomed accidents. Asset protection is a part of financial planning that tries to keep one's assets safe from creditors. The body parts and industrial accidents, natural calamity, theft, fraud, and robbery are covered by the policy. It mitigates the chances of being out of cash.
High-net-worth individuals tend to insure their rare collections, farms houses, cars, body parts, golf courses, and massive homes. Football legends Ronaldo and Messi have the most expensive insured body parts, their legs, with insurance values of $144 million and $900 million, respectively.US singing icon Madonna insured her breasts with $2 million.
Risk Management Tool
The famous Walt Disney used his life insurance to build Disneyland, his first theme park, in 1953, when no bank would lend him the money. It reduces his investment risk and liability as well as fundraising concerns. There are some major risks like business debt, personal debt, estate holder's risk, and market risk, which can be treated with insurance up to a certain parameter.
Ransom and kidnapping insurance is also available, targeting the elite class. If the business tycoon faces an accident and loses the ability of job in the long-term or short-term, the disability income insurance can protect their lifestyle. Thus, another reason why the rich class invests in insurance.
Guaranteed Growth
After the fainting covid wave, we entered into the Russia-Ukraine mess, another unexpected tsunami amid this global economic turmoil. Since covid, good sections of investors avoid money under direct market flow and look for guaranteed financial instruments like insurance. Experts say that uncertain crypto and volatile equity markets push flamboyant investors for low-risk plans.
For example, whole life insurance is assured as the cash value is not dependent on the market. It is not a subject of any market risk. It is an interest rate-driven tool. Guaranteed interest plans are insurance policies that promise the insurer a precise or fixed rate of interest for the duration of the policy.
Management Accountability Safety
Participating on company boards as non-profiting posts, you could be sued if your arbitrary decision or reformative steps drag a significant drop in PAT(Profit after tax) on the balance sheet. Directors and Officers insurance covers personal liability arising from claims made against Directors, and Officers, for claimed misstatements, neglect, errors, or breach of duty when serving in a managerial designation.
These top executives are answerable to their shareholders or investors. In case of any wrong decision by them, if the company faces loss, then criminal or civil action is very common. D&O liberty insurance cover this protection. They have to face a legal battle for:
- Defamation, slander, the act of omission or negligence, violation of duty, breach of trust, misrepresentation or misleading statement, defamation, slander, the act of omission or incompetence.
- Discrimination, retaliation, slander, refusal to promote, sexual harassment, and other inappropriate workplace behavior are examples.
- Claim exclusively based on their social standing.
Conclusion
Thus, the rich invest in insurance for multiple reasons like future financial security, debt management, and family protection, among other things, in the event of an unforeseen environment. According to NCLT, a quasi-judicial authority, 283 Indian companies were declared insolvent after the unpredicted lockdown jolt. Affluent Indians are also facing huge medical debt in post-covid recovery.
So, in this current context of financial turmoil, lockdown, and covid concern, insurance is critical to reducing unplanned financial effects and creating financial security.
FAQs
Why do rich people buy insurance?
Rich people buy insurance for reasons like:
- Smooth transfer of wealth to the heirs
- To help pay future estate taxes
- Future risk management
- Asset protection
- Easy cashflow in tough times
- Relief from tax
Why permanent life insurance is a good investment?
Permanent life insurance is a good investment because you do not have to pay taxes on interests, dividends, or gains on the cash value of your insurance until you withdraw it.
What is the difference between investment and insurance?
A simple difference between the two is that investment takes care of your present and the near future whereas insurance takes care of you and your family in the long run.
Why do rich and famous people insure their body parts?
The rich and famous people insure their body parts to supplement the lost income in case a body part is injured, handicapped, or lost.
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