4 Surprisingly Smart Ways To Use Life Insurance To Build Generational Wealth
Written by
Chris Adam
Edited by
Kristen Mae
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It’s not the cheeriest topic, but life insurance can play a powerful role in your long-term financial plan. Along with providing a safety net for your loved ones, life insurance can also be a tool to build and protect wealth that lasts beyond your lifetime.
Here are four expert-backed ways to use life insurance to help your family thrive for generations.
1. Use Wealth-Building Components
Most people think of life insurance as a financial safety net to keep their family afloat if they pass away. That’s part of it — but it can do much more, said Laura Gariepy, a licensed life insurance agent and owner of Gariepy Financial Group, LLC.
“For instance, your beneficiary could invest the payout, helping the money grow into a substantial nest egg that helps future generations thrive,” Gariepy said. “Plus, some life insurance policies have a wealth-building component built in. Select indexed universal life (IUL) policies have the potential to build significant cash value over time.”
2. Pass Along Tax Advantages
One of life insurance’s biggest perks is that the payouts are typically income tax-free. That means your beneficiaries are likely to receive the full face amount of your policy, minus any outstanding loans.
“That means they’ll have more funds to cover living expenses, pay off debt, invest or bequeath to their heirs,” Gariepy said.
It’s a rare opportunity to pass along wealth with minimal tax drag — something most other financial assets can’t offer.
3. Provide Financial Security for Future Generations
Life insurance doesn’t just help with immediate needs like funeral costs or replacing income. It can be part of a long-term strategy to support your heirs. Some families even use it to fund a trust, support a family business or cover estate taxes.
According to Neil Solarz, shareholder and director at Weinstock Manion, in larger estates, you don’t want the insured decedent to own the policy. He said many people create an irrevocable life insurance trust (ILIT) to own the policy with a trustee of that ILIT who is someone other than the insured.
This strategy ensures the policy proceeds won’t be included in the estate, helping to avoid estate taxes. And those proceeds can be directed according to the trust’s terms.
“These trusts can also have provisions for the surviving spouse and children following the death of the insured,” Solarz added. “When the policy proceeds come in, they will be income tax-free and transfer tax-free.”
4. Tailor Your Insurance Plan To Meet Future Needs
There are two main types of life insurance: term and permanent. Term policies are usually cheaper and provide coverage for a set period, while permanent policies like whole life or universal life come with higher premiums, but they also offer a savings or investment component, according to Solarz.
“Life insurance builds up income tax-free, similar to a retirement plan,” Solarz said. “For many people, life insurance can be a form of forced savings if they’re not otherwise putting money away. However, whole life policies can be expensive and may not be affordable for those in growth mode.”
So how do you figure out which type of policy fits your needs? Gariepy suggests starting with a few basics:
- Set clear goals for what you want your policy to accomplish.
- Learn the pros and cons of different life insurance types.
- Set a realistic budget based on your current financial situation.
- Work with a qualified and reputable life insurance agent who can explain your options clearly.
Bottom Line
When used strategically, life insurance can do far more than cover funeral costs. It can be a smart way to build financial security that reaches generations beyond you. With the right strategy, it’s more than protection. It’s a legacy.
Looking to build a legacy? Check out our Life to Legacy guide for expert advice and smart moves you can make today.
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