Since the policy is so large, it had to be taken out with 19 different insurance companies. If a single insurance company had underwritten the policy, they would risk bankruptcy if the policy were ever to be collected on. The insurance policy also doesn’t come cheaply. The billionaire will have to pay over $1 million a year — somewhere in the low digit millions — as the premium for the policy.
The question which immediately comes to mind is, “Why would someone with a billion dollars need a life insurance policy at all, let alone one for $201 million?” It’s a good question, especially since insurance is usually purchased by those who wouldn’t have the money to pay for something if a disaster would happen. A person who is rich enough to find himself on the world’s richest people list would certainly not fall into that category.
For the average person, taking out a large insurance policy while having a large net worth doesn’t make much sense. Life insurance is to cover lost wages resulting from the untimely death of a spouse, where the earnings were needed for the survival of the family. Those families with a large net worth can get by without any additional income since they already have a good amount of money stocked away. In a sense, they are already self-insured against such a tragedy due to the money they already have. So why would a billionaire take out such a large policy?
The most likely answer to this question is taxes and estate planning. Upon death, an estate would be liable to pay off loans on any leveraged properties, plus a lot of money as part of the death taxes owed. This could force the estate to liquidate holdings to raise the money to pay off these liabilities even if it weren’t the most opportune time to sell the assets. By taking out the life insurance policy, it would give the estate more flexibility in paying off the taxes and other debts owed, without necessarily having to sell assets to do so.
It should be noted that this isn’t an investment made by the billionaire. The companies underwriting the policy get the premiums and the interest they earn on them which should pay them more than the policy if the billionaire lives the quality life that is expected for him. Their risk is that he may die unexpectedly before he should. The insurance companies have crunched the numbers and believe that they will make money on this policy. If they didn’t believe that, they would have never have issued it.
Life insurance can be an important tool to help protect the quality of life of others in the family should there be an untimely death, and the loss of the major source of income for the family. For most people, however, the goal should be to create enough net worth so that life insurance isn’t needed.