Insurance

A collection of strategies to help business owners keep more of their wealth.

Key numbers

Insurance is often pitched as a tax strategy. Cash value life insurance in particular — whole life, universal life, indexed universal life — gets marketed as a way to grow money tax-free, access it via loans, and pass it to heirs income-tax-free. The pitch isn't wrong, exactly. But it's often backwards. The insurance-as-investment approach works best when the protection is what you need first and the tax efficiency is the secondary benefit, not when you're trying to manufacture a tax shelter.

What actually matters

Disability insurance

Your primary asset as a business owner is your ability to generate income. A car accident, illness, or injury that keeps you from working is financially catastrophic — more so than death, in many cases, because the bills keep coming but the income stops. Most high-income business owners are significantly underinsured for disability.

A good disability policy replaces 60–70% of income if you can't work. At $750,000 in income, that's $450,000–$525,000 per year. Business owners can often structure a policy that covers both personal income and overhead expenses. Premiums are generally not deductible if you pay them personally (the tradeoff is that benefits would be tax-free), or deductible as a business expense if the business pays them (benefits become taxable). Your CPA and insurance advisor should model both.

Life insurance for income replacement

If you have a family depending on your income, a straightforward term life policy provides coverage at the lowest cost. A 20-year level term policy for $2–3M ensures your family isn't forced to liquidate assets or change their standard of living. This is simple and inexpensive. Get it in place first.

Life insurance in estate planning

If your estate is large enough that estate tax is a real concern, life insurance can be used to provide liquidity to pay that tax without forcing a sale of business or real estate assets. The key is keeping the policy out of the taxable estate. An Irrevocable Life Insurance Trust (ILIT) owns the policy; the death benefit pays out to the trust, outside the estate, with no estate tax. The beneficiaries receive the funds to pay the estate tax or for their own use. The tradeoff: the trust is irrevocable, you give up control, and there are administrative requirements.

Cash value life insurance as a tax strategy

Permanent life insurance builds cash value over time. You can borrow against it without triggering income tax. The growth is tax-deferred. Death benefits pass income-tax-free. These are real benefits.

The question is whether you'd be better off buying cheaper term insurance and investing the premium difference in a taxable brokerage or maxing your 401(k) and Roth. In most cases, at younger ages and with access to other tax-advantaged accounts, the answer is yes. Cash value policies have high embedded costs — agent commissions, mortality charges, administrative fees — that create a drag that takes years to overcome.

The cases where cash value life insurance genuinely makes sense: you've maxed every other tax-advantaged account, you have legitimate estate planning needs, and you've stress-tested the policy's illustrated returns against realistic assumptions. If someone is selling it purely as a tax strategy without discussing the insurance fundamentals, that's a red flag.