Estate planning is about more than preparing for your death. It’s about preparing to help the generations of your family who follow you to live.
For many people, a focus is on building generational wealth, and that goes beyond simply building up a retirement fund or a stock portfolio to pass on to their heirs. For those who want to know the next generations are cared for, they often add life insurance to their estate plans.
“Life insurance can provide benefits that go beyond payment to meet the immediate needs of beneficiaries,” said Shane Canfield, CEO of Worldwide Assurance for Employees of Public Agencies. “It can create estates or provide funding well into the future for loved ones or philanthropy. For example, as someone with a son who has special needs, I will use a trust, funded with life insurance, to provide for him for the rest of his life. Life insurance is more than a financial planning strategy; it is peace of mind.”
Types of Insurance
In shopping for insurance, you’ll hear two types: term life insurance and permanent (most commonly referred to as whole life) insurance.
According to insurer Nationwide, term life provides a tax-free death benefit to the beneficiary upon death of the insured. It offers insurance protection for a specific number of years, generally ranging in increments from 10 to 30 years. It’s often what breadwinners will buy to protect their young families.
Permanent insurance goes an additional step. It covers an entire lifetime, and it comes with a higher premium payment. It also has a tax-free death benefit but is designed to have cash value over time. It doesn’t expire at the end of a term.
Life Insurance for Generational Wealth
Rachel Marshall, the co-founder of The Money Advantage, is a proponent of whole life insurance, and she has a personal tale behind it.
“Life insurance isn’t a need product; it’s about creating everything you want for your family. And it isn’t just for a what-if scenario; it’s for when,” she said. “My near-death experience showed me that death is a reality we all will face. We don’t know when.
“If you have a whole life policy, you guarantee that whenever you graduate from this life, you’ll leave behind the greatest gift of love so your family can live out the dreams you planned together — whether you’re there for them or not. For me, whole life insurance is peace of mind that no matter whether I live until tomorrow or until I’m 112, I will deliver the greatest legacy possible to my children — supplementing all the other assets I built during my lifetime.”
Marshall said whole life insurance does double duty.
“All along the way, I have a place to store cash and use it simultaneously, so my money is working in two places at the same time,” she said. “I get tax advantages that (keep) my wealth intact, and my children won’t pay income tax on the death benefits, so they’ll have as great a financial inheritance as possible.
“And, because the death benefit is always more than you’ve paid in, when the life insurance check is used to buy more life insurance in each generation, you create the foundation for tremendous generational wealth.”
Other Life Insurance Benefits
Life insurance has other practical benefits that can assist you during your life and help your heirs after you’re gone, said Tanya Taylor, a financial coach in New York City and the founder of Grow Your Wealth.
“The death benefit can be used toward paying off your estate taxes, instead of selling assets,” she said. “Death benefit can also be used to pay off debt and help with final expenses.”
Additionally, she said, if you own a whole life policy, you can take cash out if you are short of money or impacted by volatility in the stock market. If you own a business, life insurance also helps with succession planning.
More From GOBankingRates