Who Uses Life Insurance and Who Doesn’t?
Nearly nine in 10 respondents own life insurance, personally in trust or through their company, and 59 percent anticipate adding additional coverage. The majority (56 percent) own five or fewer policies, indicating a potential concentration of risk in an insurance carrier and/or the underlying design characteristics of the policies. This, along with other issues, suggests that life insurance is not subjected to the same due diligence and scrutiny as other financial assets.

Of the 13 percent of family offices that do not own life insurance, all have implemented other techniques: Two-thirds say they are self-insured, and half believe that it costs too much. While only 20 percent of the respondents admit they don’t understand life insurance, we see inconsistencies among other answers in the survey that would indicate this percentage is probably higher among both those who own life insurance and those who do not.

Tools for Wealth Transfer and Preservation
Life insurance is largely used by family offices to fund estate taxes (59 percent); replenish or preserve buying power (50 percent); and create liquidity (44 percent). No other option in the survey, including estate equalization, business continuity or enhancing charitable gifts, exceeded 15 percent.

Family offices have begun to recognize and react to the effects of the dilution of wealth across multiple generations. Without intervention, the buying power per individual of each generation diminishes significantly, primarily due to two factors: estate taxes and the growth of the family outpacing the growth of the assets.

Assuming living expenses and philanthropy offset investment growth, if a couple worth $100 million has four children, and they each have three children, individual wealth shrinks to $25 million each for the children and then to $8 million for each grandchild. Estate-tax burdens further diminish the amount of wealth transferred. Today family offices are turning to life insurance to both fund estate taxes and replace at least a portion of the wealth lost to the unavoidable dilution that comes with multiple heirs.

Wealthy families are also starting to view life insurance as an alternative investment strategy, as reflected by the 12 percent that use it to leverage generation-skipping trust assets. For those with a multigenerational view, insurance can be an attractive asset class when measured by the internal rate of return of the premium to the coverage amount—and when considering tax advantages, potential stability, predictability and noncorrelation to other investment alternatives.