Building a solid foundation of (tax-free!) wealth for your children and grandchildren is easier than you think.
Key takeaways:
- Life insurance is a vital tool in creating multigenerational wealth
- There are several types of permanent life insurance, depending on your needs
- You can grow it tax-free
There are many ways to generate wealth across generations, and life insurance is one of the most important. It’s a tax-free way to plan for the future, take the financial burden off your dependents, and be ready for whatever comes down the road. It grows over time, leaving a generous benefit to your family once you pass. For these reasons and many others, it pays to make life insurance a priority in your financial plans.
Let’s walk through exactly how life insurance grows wealth, your options when purchasing life insurance, and the benefits different policies provide.
How life insurance increases wealth
There are many ways that a life insurance policy can help increase generational wealth:
It pays out a guaranteed death benefit
This is the most basic feature of any life insurance policy. When the policyholder passes away, the policy pays money to their designated beneficiaries.
It provides cash value
This savings feature grows with each premium payment and earns a rate of return based on the performance of a sub-account or index. Some policies even pay dividends.
You can take out a tax-free, low-interest loan against the policy
If you borrow against your policy, you will usually receive a lower interest rate than those of a bank or third-party lender. You can use this money to grow wealth through investing or starting a business, or to provide for your children’s future by paying for college.
As you can see, there are many financial advantages to taking out a life insurance policy. But what type of policy should you purchase? Read on to find out.
Types of permanent life insurance
There are three major varieties of life insurance:
1. Variable life insurance
Variable life insurance plans generate cash value using accounts that follow the market, such as bonds, equities, and money market accounts. When the market does well, so do these investments. But when things trend downward, your accumulated wealth will do the same. A healthy appetite for risk is helpful when choosing a variable policy. If you want a more conservative, steady approach, it may not be the best fit for you. Variable policies also tend to come with higher brokerage and administrative fees.
2. Universal life insurance
Universal life insurance offers a bit more flexibility. You can raise or lower the amount of the death benefit and premiums, though there are some limitations. A portion of each premium payment goes into an investment account and you get to keep any interest that it earns. The interest grows tax-deferred and boosts your policy’s cash value. You can pay premiums using this cash value – but be sure to keep an eye on your balance. If you suddenly overdraw your cash value, your policy could lapse.
3. Whole life insurance
In place of flexibility, whole life insurance offers guarantees. It guarantees lifelong coverage, a death benefit, a fixed rate of return, and growth in cash value. You can borrow against the cash value which gives you options in the event of an emergency. It’s ideal for long-term obligations such as ongoing care for an adult with special needs or expenses after you pass such as estate taxes. It also provides both coverage and savings—your insurer deposits a portion of premium payments into an investment account or high-interest bank account. This allows you to build tax-deferred savings. Whole-life policies may also pay dividends in the form of annual cash payments or reduced premiums. Or you can just leave them alone to accumulate interest.
No matter the type of policy you choose, the goal is to generate wealth that you can pass on to your heirs. Here’s how:
Tools to create multigenerational wealth
There are a number of specific methods you can use to put a life insurance policy to work.
Tax-free payments
The money in a life insurance policy isn’t usually counted as part of your gross income, so when your heirs or dependents inherit it, they won’t have to pay taxes (however, any interest earned on the policy would be taxable). This can make a real difference in improving a family’s economic outlook.
Another piece of the tax puzzle is estate taxes, which can be substantial. For context, the federal estate tax exemption in 2022 was $12.06 million for individuals and $24.12 million for couples. This year, it will increase to $12.92 million. Estates valued above that amount owe a 40% tax. Your state may also have its own estate tax. A life insurance policy is a reliable way to avoid these taxes.
Investment in your children’s education
If you should pass away prematurely, a life insurance policy can provide financial stability for your children, including providing money for college. You can also use the cash value of a permanent life insurance policy to help pay for college while you’re still around. Just remember that every time you make a cash value withdrawal, it reduces the death benefit until you replenish it.
Emergency fund
Whether it’s an unforeseen medical bill or a loan to keep your small business afloat, a life insurance policy can help see you through an emergency. Medical bills cause more than their fair share of financial hardship—41% of Americans (100 million adults) live with medical debt, and 12% owe $10,000 or more.
And the emergency may not be yours. Whether a child is in the midst of a divorce, or a grandchild has special needs, life insurance gives you the ability to reach out and offer help when it’s needed most. You will be charged interest on the loan, but likely at a lower rate than other lenders. You also have built-in collateral, which makes getting the loan that much easier.
In short, a life insurance policy can do a lot more than pay for your funeral. It’s a key tool for building wealth and protecting yourself – and your family – against emergencies. If that sounds like something you might be interested in, the next step is to speak with a reliable insurance agent.
Grow generational wealth
We all want to build wealth for this generation and many more to come. A life insurance policy is an easy, affordable way to get started. It may not benefit you directly, but your children and grandchildren will feel its powerful effects. NICRIS Insurance can walk you through the process and help you find the policy that works best for you. Get in touch today for a free consultation.