Key points covered in this article:

  • Strategic use of life insurance can help protect and preserve real estate and investment assets from estate taxes.
  • The right policy can offer accessible, flexible liquidity to support both personal and investment-related needs.
  • Life insurance can play a vital role in business succession planning and long-term continuity.
  • Additional benefits include tax-efficient growth, supplemental retirement income, and a streamlined transfer of wealth to future generations.

 

Being an investor in real estate requires a great deal of skill, including identifying potential investment opportunities, planning for capital investment, and maintaining properties over time.  Yet one risk that is often overlooked is the impact of the investor’s untimely death. For high-net-worth investors whose estate values exceed the lifetime exclusion amount, this can lead to substantial exposure. These investors face unique financial challenges and opportunities that make life insurance an essential component of their wealth management and estate planning strategies.

Protection of Wealth and Legacy

High-net-worth individuals often accumulate significant assets in real estate and other investments. Life insurance provides a tax-efficient way to help protect and preserve these assets for heirs. When an investor passes away, estate taxes can consume a large portion of their wealth—up to 40% federally for estates exceeding $13.99 million as of 2025, plus potential state taxes. Life insurance proceeds can provide the liquidity needed to pay these taxes without forcing the sale of valuable real estate holdings, helping preserve the estate for beneficiaries.

In most cases, heirs only have nine months from a decedent’s date of death to pay any estate tax due. If the estate is largely illiquid and concentrated in real estate, this timeline can create additional stress. Executors may need to determine which assets to sell, whether they can get a fair price, and whether proceeds will arrive in time to meet the estate tax deadline. Life insurance can help mitigate this issue by providing immediate liquidity when it is needed most.

Access to Liquidity and Capital

Real estate investments are typically illiquid, meaning converting properties to cash quickly can be difficult or costly. Life insurance policies, especially whole or universal life, build cash value over time that investors can borrow against or withdraw. This cash value can likely be used to fund new real estate acquisitions, refinance existing properties, or cover unexpected expenses without disrupting the overall portfolio or relying on traditional financing.

Risk Mitigation and Business Continuity

For real estate investors who also own businesses or partnerships, life insurance can help fund buy-sell agreements and support succession plans. If a partner or key stakeholder dies, the proceeds can facilitate a smooth transition of ownership, helping protect the business’s value and operations. It also provides peace of mind that the business and family wealth can continue without disruption.

Tax Advantages and Retirement Planning

Permanent life insurance policies offer the potential for tax-deferred growth of cash value and may allow for tax-free loans or withdrawals. These features can be strategically used to supplement retirement income or manage tax liabilities. For wealthy investors with substantial taxable investments and real estate holdings, life insurance offers a way to optimize their tax position and create a tax-efficient income stream in retirement. Policy loans and withdrawals are generally not taxable if structured properly, but this may not apply in all situations.

Estate and Legacy Planning

Life insurance is a powerful tool for high-net-worth investors to create a lasting financial legacy. Policies can be placed inside irrevocable life insurance trusts (ILITs) to keep proceeds out of the taxable estate, further minimizing tax burdens. Heirs can receive a tax-free death benefit that covers estate taxes and other costs, enabling the investor to transfer wealth according to their wishes.

However, evolving tax guidance has complicated estate planning for real estate investors. One of the greatest benefits of investing in real estate is the ability to capture a step-up in basis upon death and significantly reduce capital gains taxes for heirs. But in 2023, the IRS issued Revenue Ruling 2023-2, which generally eliminated the step-up in basis for assets held in irrevocable trusts.

This creates a planning tradeoff. Keeping real estate in the taxable estate allows heirs to benefit from a step-up in basis, but it may trigger a significant estate tax bill. Life insurance can help bridge that gap by providing the liquidity needed to pay estate taxes, enabling families to retain real estate assets and receive stepped-up basis.

Planning for the Future

Integrating life insurance into a broader financial and estate plan is a critical step for high-net-worth real estate investors seeking to protect their assets, support succession, and leave a lasting legacy. To discuss your unique situation, contact Ryan Paul, Partner on the PBMares’ Construction & Real Estate team or Dan Yoo, Senior Wealth Advisor on the PBMares’ Wealth Management team.  .