Life insurance can provide three main benefits:
- Effective Estate Planning
- Generational Wealth
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When protection is your main reason for purchasing life insurance, you’ll want to sincerely consider a term policy. A term policy protects your loved ones financially within a specific time-frame, for instance, when you have young children and you’re paying a mortgage on your home. Such a policy would shield your family against a catastrophic loss of income event. In essence, when your objective is protecting your loved ones, life insurance should not be viewed as an investment vehicle, but rather a means of safeguarding the ones in your life who matter the most.
When the time comes to approach estate planning, reducing overall tax liability is often a primary aim. Thankfully, you have an invaluable tool. Without question, one of the best choice is to use a permanent life insurance product. The reason? The proceeds from a life insurance payout is entirely tax free. When choosing a permanent life insurance product, you generally have two options:
- A single-premium, paid-in-full policy
- A traditional monthly or fixed-term payment approach
Naturally, the best choice depends on your situation. Oftentimes, it’s based on a person’s personal liquidity. Do you have the cash on hand to make a lump-sum payment? How much leverage do you gain by using the life insurance policy?
However, the real key in estate planning is to make the policy’s beneficiary a person or entity outside of your estate. One possible strategy is to designate a trust as the receiver of the insurance proceeds.
The main advantage of using a trust is simple. After you die, you still maintain control over your assets. Often a person will do this if they want to pay the taxes on the estate from the trust in order to keep an asset intact so it doesn’t have to be sold, like a family home or business.
Otherwise, you may decide to leave the benefits of a life insurance policy to an individual if you want to give them the flexibility to use the insurance money however needed.
Building Generational Wealth
Historically, wealthy American families created generational wealth by buying life insurance policies and leaving the proceeds to a child or grandchild. Doing so ensured that when the parents died, a large sum of capital was passed down to the next generation. A more modern approach would be to first build up assets in a permanent policy and then take loans from the policy to make major purchases (i.e., a car, or home). Essentially, this allows you to become your own bank—you borrow money from yourself, and you pay yourself back in the life insurance policy. It’s a great tool for people who want to avoid taking on additional debt. Not only are you borrowing money from yourself, but you’re doing so in a disciplined way.