September 22, 2026

How life insurance can provide liquidity for wealthy families

For many clients, life insurance serves as a straightforward income replacement tool. The goal is usually to protect a spouse or children if a paycheck suddenly disappears.

However, when clients accumulate significant wealth, that may no longer be the most useful framework for advisors.

For high-net-worth families, the better question is often, “What can the next dollar placed into life insurance accomplish that the same dollar in a brokerage account, bond portfolio or real estate cannot?”

That becomes particularly important for families whose wealth is concentrated in businesses, real estate, stock, or other illiquid assets. Without adequate liquidity, heirs may ultimately be forced to sell assets at an inopportune time to cover taxes, expenses, or other obligations.

That’s where life insurance can play a role in a client’s comprehensive plan. It offers a source of liquidity that doesn’t depend on market conditions or the timing of an asset sale.

“Where else can you turn a small amount of money into a much larger benefit right away, while potentially getting tax and creditor protection?” said Dave Buckwald, partner at Prosperity Capital Advisors.

How to evaluate a client’s next dollar

Oftentimes, advisors compare a client’s death benefit with their expected equity returns. However, that doesn’t make sense as these assets have different roles.

“Equities are there to grow while life insurance is there to provide a known amount of cash, generally tax-free at an unknown point in time,” said David Fisher, founder and CEO of Summit Income Planning Group.

For this reason, Fisher recommends comparing a client’s life insurance plan to their other fixed-income assets, rather than their entire portfolio.

“Model the internal rate of return on the death benefit at year 10, 20, and at life expectancy, and compare it with the after-tax return of the bonds or other fixed-income assets you’d otherwise hold over the same horizons,” Fisher explained.

The Internal Rate of Return (IRR) on insurance can look very high early on and decline the longer a client lives.

“That approach tells you more than any argument about whether insurance is ‘a good investment,’ which is actually a question I’d discard entirely,” Fisher said.

The next step is to look into a few factors IRR doesn’t capture.

First is certainty of delivery: few assets in a portfolio can provide a known sum precisely when a liquidity need arises. Second is tax treatment, which should be evaluated separately rather than baked into the return calculation and used to make the numbers look more attractive.

The third is opportunity cost.

“The uncomfortable part advisors don’t consider is opportunity cost. A dollar directed toward premiums is a dollar that no longer compounds elsewhere,” Fisher explained.

Why wealth doesn’t always equal liquidity

Net worth is a number on a balance sheet, but obligations and liabilities must be paid in cash. Many high-net-worth families confuse the two constantly, and an illiquid estate can get expensive if protective measures aren’t put in place ahead of time.

“A business, real estate portfolio, or concentrated stock position only carries value if a buyer exists when you need it,” Fisher said.

That’s a short window to sell a business at a favorable price. The same challenge can arise with commercial real estate and concentrated stock positions, which could take time to sell or may be worth less if the family has to sell during an unfavorable market.

In many cases, taxes aren’t the only financial obligation that requires liquidity.

A buy-sell agreement may be triggered, while personal guarantees on business debts may also need to be addressed. Bank covenants may come into play, and professional fees can add up. A surviving spouse may also need income immediately, not after probate concludes.

A liquidity issue can force a family to sell an asset they wanted to preserve.

As a result, Buckwald often refers to life insurance as liquidity insurance when discussing it with high-net-worth clients.

“These clients insure their artwork, yachts, mansions and businesses so they understand they need to insure their liquidity as well in order to keep a lifetime of work and success in the family for generations to come,” Buckwald explained.

Turning life insurance into a liquidity strategy

For high-net-worth families, a life insurance policy buys time.

“Time for the businesses and assets to be sold rather than under pressure in the nine-month window when federal estate tax is generally due,” Fisher said.

Chances are clients would much rather gain the time to sell their assets strategically than rush to sell.

“Giving an estate more time to sell a business or real estate can help maximize the value of those assets. When you’re under a deadline, that’s when buyers come looking for a deal,” Fisher explained.

Before leveraging life insurance as a source of liquidity for wealthy clients, Fisher shares a few words of caution.

First, ownership must be structured properly.

“Life insurance proceeds are generally income-tax-free, but they can increase the estate tax obligation if the policy is not structured correctly for a high-net-worth family,” Fisher said.

Second, don’t assume an estate tax election will solve the liquidity issue.

Businesses may have an installment election available for estate tax, but it comes with interest, a long-term lien, and the assumption that the business will continue performing without the person who built and ran it.

Life insurance can provide liquidity without relying on the business to continue performing.

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