The impacts of life insurance
A huge part of financial security is life insurance. Although it can often feel like another expense leaving your pocket each month, its impact on families is life-altering.
A bad situation can become financial security through vehicles like term life insurance. The purpose of this article is to describe how something as simple as life insurance can impact a family for generations.
Generation I
Let’s say your parents are the first generation to have life insurance. Your mom and dad were very financially responsible. They each had $500,000 policies on each other, bought in their late forties, for 30-year terms.
Your dad made it to 76, and his death benefit was $500,000 to your mom. Your mom invests that $500,000, changes the beneficiary from her husband to you, and makes you her beneficiary for her investment account as well. She dies a couple of years later, with one year before the term expires, and the $500,000 death benefit goes to you - Tax-free. Because she invested the other $500,000 and named you as the beneficiary, that $500,000 grew to $550,000, and with the step-up in basis, there are no taxes that you owe on that, and your basis in the investment account is $550,000 + $500,000 = $1,050,000.
Therefore, because your parents bought $500,000 in coverage, and invested it between deaths, the beneficiary, which is you, is now over a millionaire in their 50’s.
Generation II
You are generation II. Let’s say you took your parent's advice and got life insurance when you were young. It is cheaper, you are healthier, and the payments do not change. You buy $1,500,000 in 30-year coverage for you and your spouse. You are paying very little for a good amount of coverage. This is very common.
Towards the end of your and your spouse 30- year terms is when your parents pass away. You are glad to have the money as a nest egg in retirement and hope to be able to do the same for your kids. So, you both buy another round of 30-year terms at the same coverage level since your old term coverage expired. Although far more expensive now, you are in a place where the death benefit is more important for your kids than the money you both have now. You both live long, happy lives, but ultimately, like all of us, eventually, you both die.
Not only will your children receive the $1,050,000 that grew for 30 years (not unreasonable to assume close to $4,000,000 now), but they will also receive the $3,000,000 in combined death benefits. In their 50s, each of your kids could now have a nest egg of well over $1,000,000, obviously depending on the number of kids you have. You can see where this is going.
Generation III
So far, the third generation is the greatest benefactor of their grandparents' and parents' decisions. Because of these decisions, they may start businesses, invest in start-ups, or be extraordinarily charitable. Life insurance was created to open all doors for the future and let them choose the path.
With higher net worth people, something to consider is creating a trust from the insurance, otherwise known as an Irrevocable Life Insurance Trust (ILIT). This can help stipulate the terms and conditions of how the money will be available to its heirs.
As the third generation, they are responsible for keeping this exponential growth of wealth alive. Not only can wealth be generational, but the only way for it to happen is for advice to be generational. That all starts with speaking with an advisor.
The power of speaking with your advisor
I would be happy to discuss your questions about life insurance and see what coverage would make sense for your specific situation. Please feel free to reach out to me with any questions.
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