Permanent life insurance can pass tax-advantaged assets to any chosen beneficiaries. Read on to see which plan is best for your family.
Do you have a financial goal to grow generational wealth? Permanent life insurance can pass tax-advantaged assets to your children or whoever you choose as your beneficiaries. However, not all types of permanent life insurance offer the same guarantees. Also, there is one type of insurance that can help you grow generational wealth faster. This blog will explain the types of life insurance that can grow generational wealth and help you decide which is best for your family.
How Does Permanent Life Insurance Grow Generational Wealth?
Permanent life insurance, which includes variable, universal, and whole life policies, pays a guaranteed death benefit. They also have a built-in savings component called a cash value (so long as you pay your premiums). Depending on your policy, the cash value in permanent life insurance increases with each premium you pay. It also earns a rate of return from your insurer.
In some cases, you’ll have guaranteed returns. In others, the returns depend on the performance of an index or sub-account. Some policies also pay out dividends which help you grow wealth even more.
Each of these lets you take out a loan against your death benefit up to the cash value amount in your policy. These loans are usually tax-free. Also, the interest rate charged by an insurance company for a loan is generally lower than the interest rate a bank or third-party lender would charge you.
Depending on your rate of return and your insurer’s interest rate, it’s possible to pull out a policy loan and still have net positive interest earnings. One type of life insurance pays a guaranteed rate of return regardless of the outstanding policy loans, meaning you can simultaneously borrow a dollar and earn interest on it.
We want to clarify that when you pass away, your policy’s death benefit goes to your heirs, not the cash value. However, what you do with the cash value during your lifetime is critical in achieving generational wealth.
Many families:
- Use policies to pay for college education.
- Invest in real estate
- Generate business capital or other purchases that increase the assets and earning potential of the family for generations
When you use tax-free loans with a low-interest rate and a rate of return that lets you recapture interest costs, families can save tenfold throughout the policy. Think of permanent life insurance as a private family bank that allows you to preserve more of your hard-earned money and earn more than you would if you were to hold it in a savings account.
We’ll briefly go through three types of permanent life insurance policies.
Variable Life Insurance
This policy grows cash value based on the performance of market-based accounts such as:
- Equities
- Bonds
- Money market accounts
You can insert your cash value into these accounts. Your wealth will grow when the accounts do well. However, in a market downturn, the cash will lose value. Therefore, it’s always best to work with a financial advisor or reduce risk however possible.
Universal Life Insurance
The cash value of this policy grows based on index performances such as the S&P 500 and investments held by the insurance company. You can invest the cash value into these accounts or keep it and earn a low, guaranteed rate of return.
If you invest when these indexes and investments do well, your policy’s rate of return will reflect that performance. You might not earn anything during a market downturn. It’s also worth noting that universal policies might cap growth, which could limit your earning potential. However, they are slightly less risky than variable policies.
Whole Life Insurance
This life insurance plan earns a guaranteed rate of return as soon as you purchase the policy. Instead of investing cash value in market-based accounts, it stays protected in your plan and is available when you need to use it. It’s the least risky type of permanent life insurance because there is no risk of losing cash value.
You’ll know how much your policy earns within a given year and be able to budget for investments or family expenses accordingly. Also, insurance companies pay out dividends that aren’t guaranteed. However, mutual insurance companies have historically paid dividends for over a century.
The point is that a life insurance policy does so much more than cover funeral expenses or monthly bills such as a mortgage. The right life insurance policy can cushion your descendants for generations to come. Contact Malden Solutions today to learn more about why having life insurance is vital.
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