At first glance, £200,000 in life insurance premiums might seem excessive, especially when it’s more than many people earn in a year. But when the policyholder’s net worth runs into the millions, the rationale becomes more intriguing. So, why would a multimillionaire buy a life insurance policy?
For those with substantial wealth, professional estate planning advice is readily available, and there are numerous options to mitigate inheritance tax (IHT) without relying on life insurance. Trusts, family investment companies (FICs), and other strategies can often serve as alternatives. So, why consider life insurance?
Let’s put this into perspective. If your wealth is measured in the millions, it likely means your rate of return on capital is exceptional. Imagine this: if you started with £10,000 and over 20 years, your net worth grew to £30,000,000, your compound annual return would be around 50%. In comparison, if your return was only 5% a year, you would have just £26,000.
This is where the value of life insurance comes into play. If you were to rely solely on trusts and other planning mechanisms, your returns could be closer to that 5% figure than the 50% seen in your investments. Over time, this slower growth means you could be leaving money on the table for your family.
By allocating a small proportion of your wealth to life insurance, you’re potentially allowing your assets to grow at a faster rate. This is a key benefit. Life insurance premiums, while seemingly high, may serve as a smarter move for individuals with rapid wealth growth, as it ensures wealth can continue compounding at a higher rate.
Take the example of investing in AIM (Alternative Investment Market) shares to avoid IHT. The potential for significant returns—10%, 20%, or even 50% annually—may seem improbable. So, what’s the real question here? It’s about your internal rate of return.
If your wealth is growing at just 3% annually, trusts and AIM shares may be perfectly acceptable tools for tax planning. But what if your wealth is compounding at 10% or 20%? In that case, using slower-growing assets like AIM shares or setting up complex trust structures could mean sacrificing the growth potential of your wealth.
When you consider the £200,000 premium in isolation, it may seem extravagant. But perhaps the person paying that premium understands something you don’t: the real value lies in preserving and compounding their wealth at a much higher rate. Do you know how fast your wealth is growing?