When we think about life insurance, the concept of using an insurance plan to build wealth does not necessarily come to mind. Maybe this is due to the sensitive nature of life insurance and its perception around using it to generate wealth.
In reality, life insurance as a tool for building wealth has been in use for quite a long time. Let’s look at a few simple strategies to use to generate or transfer wealth to your loved ones.
Estate planning with a life insurance policy
Purchasing a life insurance policy is just a part of the process. It is still crucial to have a complete estate plan. To ensure that your family is well taken care of, it is key to have all the necessary measures ready.
One key benefit of being prepared is that a life insurance policy can be used to protect and build wealth for your family. This gives them the opportunity to have larger coverage and set them up to thrive rather than survive in the event of your demise.
Which life insurance policies can be used to build wealth?
A term policy or even a whole life policy can be used to generate wealth.There are several whole life policies that offer an investment element usually referred to as ‘unit linked’.
But, it should be noted that a term policy can offer just as much coverage and investment opportunities under the right circumstances.
Key aspects to consider about a life insurance payout
For people that own a life insurance policy that pays out, it might seem like quite a simple transaction. But it is not as straightforward a process as one might expect.
Any sum paid out will be included to your estate. This results in two key consequences:
- The time taken by your family for being allowed access to the fund can be a lengthy probate process.
- They might be subjected to a large inheritance tax bill if the sum assured goes over the personal threshold of the estate value.
How to use life insurance to protect wealth
But, you need not despair, there are a few simple steps you can take to overcome these challenges.
To protect your wealth, you can have the life insurance policy in trust. This is a specific legal document that names the beneficiaries of the policy in advance. This leads to the policy being placed outside your estate.
This results in your policy being excluded from inheritance tax. Additionally, this allows your family to have quicker access to the funds and use it to cover any costs. These costs could be financial obligations, taxes or even funeral expenses.
In the event that your life insurance policy was not written under trust, it is still possible to avoid these aforementioned challenges. But, it should be noted that this creates a potentially exempt transfer. This means that the proceeds will be subject to a certain amount of inheritance tax on the condition that the policyholder’s demise occurs within seven years of transferring the policy.
Using life insurance to build wealth
Mitigating estate costs in one way, another method is using life insurance proceeds to put your family in an excellent financial position.
It’s crucial to take appropriate measures to educate potential recipients or beneficiaries of the payout. The sum assured tends to be quite a large sum of money and they should be prepared to handle and manage it when the time comes.
Another good method of generating wealth is using some of proceeds in tax efficient way by investing in stocks and shares
The payout can also be used to fund a large expense like a real estate investment. Beneficiaries can even be introduced to a good financial planner that can explain and advise them on the opportunities available to them.
Whatever method you choose, the most vital aspect to remember throughout is that these funds should be used properly and intelligently to give your loved ones the best options for planning their future.