Can You Be Too Rich for Life Insurance?

Life insurance is often framed as a way to protect against income loss and keep your family from falling into financial hardship if you passed away. Based on that, it might feel reasonable to guess that at a certain income or wealth level, the need for life insurance disappears. But there isn’t a magic salary figure that makes life insurance stop mattering, and many families most people would consider “rich” still find it worthwhile to have coverage.

First, what is an affluent family? Factors like cost of living in your area can make a big impact on what it takes to feel “rich.”

For our purposes, we’re talking about mass affluent families that are earning 50 percent more than the median income in their area. Median household income in 2021 was $70,784, so we’re talking about families that make about $106,000 and above. If you’re in a high cost-of-living area, your numbers may be higher. For simplicity’s sake, let’s say we mean a household income of $100,000 or more.

Here’s why many affluent families still need life insurance.

Why Wealthy Families Buy Life Insurance Anyway

Recent data reports that only 1 in 3 Americans earning $100,000 to $149,999 say life insurance is a necessity. It’s true that life insurance isn’t a necessity in the same way as food and shelter, but that doesn’t mean affluent families should (or do) drop it from their list of financial tasks. In fact, 63 percent of those same families have a policy!

Whether or not they think of it as a “need,” they’re making life insurance a priority. Here are some ways high-earning families frame their thinking about life insurance.

1. Protection for actual necessities

Hopefully, you and your loved ones will lead long, happy, healthy lives, with the financial security to follow through on all the plans you dream about.

If you or your partner passed away, though, circumstances for your family could change dramatically. First, if one of you passed away, would your family still make a high level of income? Consider the loss of that partner’s salary. Also consider that the mourning spouse may want to take time off from work or refocus on the children without the stress of trying to keep up the same high level of earnings sans childcare and support. Life insurance can fill in that gap.

In addition, without one partner, the family might face higher expenses in the form of childcare, help around the house and more. If your family is making six figures right now, do some quick math: What would that same balance sheet look like if you lost an income and added expenses? 

Besides the obvious loss of an irreplaceable family member, your family would have to adapt to a new future without an important financial provider. A life insurance payout can go toward essentials like home payments, food on the table or healthcare.

2. Plan to cover future goals

You may see college in your kids’ future and want a life insurance policy to cover tuition contributions. Or maybe you’d like to help your kids get on their feet in other ways (e.g., vocational training, paying for a first car or apartment deposit, contributing to wedding expenses). 

If you have debts or dreams you’d want to cover if you passed away, life insurance coverage can be a tool to make that happen. Even families making above $100,000 may not have the disposable income to easily pay for a child’s college tuition (or multiple children’s) without taking on debt, especially if one of the main income-earners has passed away. 

3. Wealth management tool

Many families look for life insurance primarily as a way to cover their financial obligations. Depending on what type of insurance you buy, though, a policy can also serve as a wealth management tool.

For example, some types of permanent life insurance have a “cash value” component. Part of your premiums go into the cash value, which grows at a guaranteed rate or according to market performance (depending on what type of permanent life insurance you have). You might decide to buy a whole life insurance policy not only because of the guaranteed death benefit but also for tax deferred cash value growth or easy borrowing potential. 

If you are on the very high end of “affluent” (think: an estate in the tens of millions of dollars), then you might want to speak to your financial and tax advisors about permanent life insurance as a tool to help your family avoid estate tax, which kicks in at $12.92 million in 2023. If your estate’s value is more than this (or more than $25.84 million for a married couple), your estate is subject to taxes after you die. A life insurance benefit goes tax-free to the beneficiary, and you could note in your will or estate files that the money is meant to defray tax expenses.

Can You Get too Rich for Life Insurance?

For most families, even if your income puts you in a very comfortable or (dare we say it) rich situation, that wouldn’t remain the case if you lost the income overnight. As long as you’re in a position where you depend on bringing in a regular paycheck to support your lifestyle, life insurance may be an important tool to protect that income.

It’s theoretically possible for a wealthy family to self-insure by building enough savings. If you’re making a salary of $1 million and living on a household budget of $100,000, then sure, you can probably set aside enough savings in a few years to act as your own coverage. For one thing, though, that would require a lot of discipline — often, as people earn more, they spend more of that income on things they enjoy, rather than saving the vast majority. Someone in that situation might also prefer to invest money for greater potential gains, and have a life insurance policy as a source of financial security even if the market is down.

Are there people out there who have enough money that they never need to worry about leaving enough behind for their loved ones, and don’t worry about estate taxes, either? Sure — life insurance isn’t automatically the right choice for every person. But in many cases, even if life insurance isn’t a “necessity” in the strictest sense, most families won’t get too rich for life insurance to provide meaningful benefits.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Fabric by Gerber Life exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature and is not intended to be, and should not be construed as, financial, legal, or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. We make no warranties with regard to the information or results obtained by its use, and disclaim any liability arising out of your use of, or reliance on, the information.

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