Most people purchase life insurance policies to help their beneficiaries pay off debt and provide income after they pass. In addition, many people are using life insurance for retirement and other financial planning. When strategically used, life insurance offers many advantages, including the beneficiaries’ ability to build generational wealth (wealth that passes to younger generations of a family). This financial shift is critical for a brighter future for many families. A life insurance policy can protect loved ones’ present situation and help build future generational wealth.
- Use life insurance to build generational wealth and set family up for success
- Reducing debt and increasing savings are two of the ways life insurance can help
- Discuss trust options with a professional if you want to limit uses for life insurance proceeds
Covering estate taxes
Those who inherit a large estate will likely have to pay estate taxes. If you have questions about how much you may owe or the best ways to minimize your tax burden, we recommend working with a seasoned tax professional. According to R.J. Weiss, a CFP® and founder of The Ways to Wealth, “Life insurance can be used for estate taxes, which can be a significant burden for families inheriting assets. This can help ensure that families can keep the assets they inherit rather than having to sell them to pay taxes.”
As Benjamin Franklin said, “nothing is certain but death and taxes.”
Protecting quality of life
A life insurance policy set up for a child in the event of a parent’s death offers the child (or children) a built-in security blanket. Depending on the size of the policy, it could allow the other parent to maintain the family’s quality of life, including keeping the child in the same home, school district, and activities. By allowing a child to feel safe and cared for, they will fare better in educational endeavors and pursue post-graduation opportunities.
Of course, life insurance is not the only option for minor children with deceased parents. Social security can also stabilize families experiencing the loss of a parent. But these payments are generally modest. A life insurance policy can only improve a family’s outlook when combined with other resources.
Another benefit is college savings. If the parent factors in the cost of college and what their child may have to pay, having insurance money guaranteed is a great way to ensure the child will go to college and not have to worry about how they will finance it or take on a massive amount of debt to do so. A financial advisor can guide you through the planning process. But more often than not, the right life insurance plan can outperform traditional college savings plans.
Purchasing wealth where there was none
The nice thing about life insurance is you can acquire more than your net worth when purchasing. Acquania Escarne, Life Insurance Producer & Wealth Strategist at The Purpose of Money®, explains it by saying, “Life insurance is how you can buy wealth before you build it. A young, healthy person can purchase $1 million in life insurance at a low cost. You don’t even need to have $1 million in net worth when buying your life insurance policy. So don’t overthink life insurance. Just do it and then prepare your family for when the worst happens and how to handle the finances when it does.”
A licensed insurance agent can help you customize a life insurance plan to fit your budget. Especially early in life, the premiums may be cheaper than you think.
Paying off debt
If your child inherits an asset with attached debt, such as a house or car, a life insurance policy can help them cover the outstanding debt. This assistance can “increase the likelihood of future generations keeping an investment,” according to Weiss.
When inherited assets are combined with cash from a life insurance policy payout, beneficiaries can afford the assets they inherited if they so choose. For many families, it could be the difference between losing a family home and keeping it for future generations.
Providing future savings
Let’s say a parent dies and leaves a life insurance policy to cover tuition, but the child decides not to go to college. If they instead decide they want to start a business, purchase and grow a real estate portfolio, go to trade school, etc., they could also do so.
A properly managed life insurance policy would allow the beneficiary to have many options available to them in the future. Ideally, this would offer the foundation for future generations to improve their lives and the lives of future generations even further.
Leaving a built-in emergency fund
Not having an emergency fund when an actual emergency happens can cause financial disaster. With a life insurance policy set up, a beneficiary could use the inherited funds for car maintenance, unforeseen medical expenses, and other expenditures that pop up without draining their savings account. The built-in financial security can prevent beneficiaries from going into unnecessary debt or living paycheck to paycheck while they build up their savings from times of financial stress.
Creating a trust fund
Life insurance investors who want their beneficiaries to use the proceeds in a specific way can set up a trust and name the trust fund as the beneficiary. Trust funds allow the policyholder to leave instructions for how they want the money to be dispersed and used. When it comes to trust funds, Weiss adds, “It’s possible to set up a trust fund to pay for future generations’ education expenses. Alternatively, one can use a trust fund to invest the life insurance proceeds and pay a conservative withdrawal strategy to create multi-generational wealth.”
Summing it up
Escarne sums it up nicely: “Life insurance can pay off your mortgage, pay off debt, cover your children’s education and help a spouse maintain a two-income household after one spouse dies. This can change the trajectory of your family’s future. Keeping real estate in the family, getting a solid education, and more will change your family’s and future generations’ lives.”
Buyers have many motivations for buying a life insurance policy to protect loved ones. Retirement and accelerated death benefits have entered the conversation, with many buyers considering options to protect their financial interests. However, building generational wealth does not always come to mind. Taking care of your family from beyond the grave is important. However, allowing them to build wealth for themselves and their children is a unique advantage that may not be accessible without an excellent life insurance policy.
Weiss adds, “Life insurance is a guaranteed way to leave a legacy. The truth is we know that one day we will die, and life insurance is a way to provide for your family after you’re gone.”
IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021.