According to the Guinness Book of World Records, the largest life insurance policy ever taken out was in 2014, with a death benefit of $201,000,000.
The broker of record for the policy was a US life insurance broker based in California. While the name of the insured person has not been disclosed, we do know that it was a bilionnaire in the tech industry in silicone valley (also in California).
Premiums for the policy are in the single digit millions per year.
While we don’t know the details of the policy, we can extrapolate a few things about it.
Largest Life Insurance Policy: Type of Life Insurance
First, the life insurance was likely a permanent life insurance policy not a term. The policy would have been taken out with the expectation that it would be maintained for life and not lapsed after a period of time like we would expect from a term life insurance policy.
Further, it was likely a universal life insurance policy. Universal life insurance policies have a strong investment component and for the wealthly this offers two advantages. Life insurance death benefits receive preferential tax treatment compared to other investment choices so it’s a common way for wealthy clients to transfer their wealth across generations. (note that in Canada, there is no tax on life insurance death benefits. In the US there can be taxes on death benefits, but it’s still a strong contender for investments that transfer across generations). The investment component of universal life insurance also allows wealthy clients access to additional investment choices that are also taxed in a preferential manner compared to other investment choices. The result is that wealthy clients can use universal life insurance for both the life insurance death benefit and the investment options inside a universal life policy.
Largest Life Insurance Policy:The insurance company
A $200 million dollar death benefit, paid out all at once, would likely cause severe financial strain on even the largest life insurance companies.
The financial strain would also be a problem immediately upon policy sale as well. Life insurance companies are required to hold reserves – money set aside in low risk investments to meet any unexpected death claims. So when they sell a policy of this size they would be required to set aside a substantial amount of money, money that would likely have to come out of operating funds.
The solution was for numerous life insurance companies to share in the risk. A number of life insurance companies were involved in this sale, with no individual company taking more than $20 million of the overall risk.
Largest Life Insurance Policy:Reinsurance
In addition, the individual life insurance companies would likely have used reinsurance companies to further spread the risk. Reinsurance companies are insurance companies for life insurance companies. They are typically large multi-national corporations that consumers are unaware of as they operate only with life insurance companies. Life insurance companies will share premiums with the reinsurer in exchange for the reinsurer paying part of the death benefit. A common reinsurance structure might look like the life insurance company paying the first $500,000 of a life insurance policy, then splitting 50-50 any death claim amount above that.
Largest Life Insurance Policy: How was the policy sold?
Absolutely bizarre – this policy was sold in 2014, and the tech billionaire that bought the policy did so through a direct mail campaign. That’s right – the billionaire received a piece of ‘junk mail’ in their mailbox and responded, resulting in this huge life insurance policy. It’s amazing to realize that even if 99% of us throw out unsolicited mail pieces like that immediately, there’s still people that will respond and make this marketing method profitable.