Life insurance is often viewed as a necessary expense to protect our loved ones financially in the event of our untimely death. While this is undoubtedly an essential aspect of life insurance, few people recognize the potential of using life insurance to build wealth.
In this article, we will provide an overview of how life insurance can build wealth that can be used during your lifetime, as well as a few common strategies.
This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
Permanent Life Insurance as a Wealth-Building Tool
There are two main types of life insurance: term life insurance and permanent life insurance.
Term life insurance provides coverage for a specific period, while permanent life insurance offers coverage for the insured's entire life.
For wealth-building purposes, permanent life insurance is the ideal choice, as it combines death benefits with a cash value component.
Whole Life Insurance, Indexed Universal Life, and Variable Universal Life Insurance are three popular types of permanent life insurance policies that can help build wealth.
These policies have tax advantages and allow for tax-deferred growth of the cash value.
Additionally, the cash value can be borrowed against or withdrawn during the policyholder's lifetime, providing additional financial security and potential investment opportunities.
It is important to understand that most life insurance policies generally are a long term strategy for accumulating cash value.
Wealth-Building Strategies with Life Insurance
There are many ways one can build wealth through the use of life insurance, and here are some strategies that can be followed:
1. Tax-Advantaged Growth
Earnings on cash value within a permanent life insurance policy grow tax-deferred.
This means that you won't have to pay taxes on the growth unless you withdraw money beyond the sum of your contributed premiums or cancel the policy.
This tax-deferred growth allows your investment to compound more rapidly than a taxable account, resulting in more favorable long-term gains.
2. Tax-deferred Loans
Policyholders can borrow against the cash value of their permanent life insurance policy without triggering taxes, assuming it has been properly funded and structured.
This feature provides a tax-deferred source of funds that can be used for various purposes, such as paying off high-interest debt, financing a business, or investing in other wealth-building strategies.
The interest charged on these loans is generally lower than that of traditional loans, making it an attractive option for accessing funds.
The interest also does not need to be repaid. Any unpaid interest will be added to theloan balance, which will reduce the death benefit unless repaid.
3. Retirement Income
A permanent life insurance policy can be structured to provide supplemental retirement income.
By overfunding the policy (paying more than the required premium, up to a tax-guideline limit), the cash value can grow more rapidly, providing a tax-advantaged income stream during retirement.
This can help provide a bucket of federal income tax-free (if properly structured) monies to help you control the amount of taxes you will pay on your overall retirement income.
Life insurance is also a self completing retirement plan, meaning that if the insured passes away during the accumulation years, the death benefit pays out, which completes funding of the retirement plan for the surviving spouse/loved ones.
4. Estate Planning
Life Insurance is an essential tool for Estate Planning. It can be utilized to cover estate taxes, debts, fund trust, and pay other costs.
Life insurance can help maintain the estate's value for your beneficiaries, equalize your estate, take care of special needs children, leave a charitable donation, and ensure that your assets are distributed according to your wishes.
5. College Savings
A permanent life insurance policy can be a college savings vehicle.
The cash value of a life insurance policy can be used to pay for college tuition and other expenses, providing tax-advantaged funds for education.
Additionally, the cash value in a life insurance policy is not considered an asset when determining financial aid eligibility (FAFSA), unlike a 529 plan (depending on ownership).
All in all, life insurance is more than just a safety net for your loved ones. Rather, it can be a powerful wealth-building tool when used strategically.
By leveraging the tax advantages, loan/withdrawal features, and cash value growth of permanent life insurance policies, you can create a financial plan that helps secure your family's financial future and accumulate wealth over time.
White Swan is a digital broker that provides access to the universe of life insurance solutions, and can help you build tax-advantaged wealth and keep your loved ones or business protected.
Our streamlined platform makes it simple, transparent, and quick to get the optimal policy for your needs and circumstances, straight from one of America’s top carriers.
To get started you can request a personal plan online or schedule a call with one of our industry experts.