If you have a financial goal to grow generational wealth, you may have heard that permanent life insurance offers a proven way to pass tax-advantaged assets to your heirs. But not all types of permanent life insurance offer the same guarantees, and there is one type of insurance that can supercharge returns to help you grow generational wealth faster. In this article, we’ll break down the different types of life insurance that can help grow generational wealth and help you choose which is best for your family.
HOW PERMANENT LIFE INSURANCE GROWS GENERATIONAL WEALTH
Permanent life insurance, including variable, universal, and whole life policies, not only pay out a guaranteed death benefit (provided premiums are paid), but they also have a built-in savings component called cash value. Depending on the type of policy you buy, cash value in permanent life insurance increases with each premium you pay and also earns a rate of return from your insurer. Some returns are guaranteed. Others are based on the performance of an index or sub-account. And some policies also pay out dividends, further helping you grow wealth.
All of these types of permanent life insurance allow you to take out a loan against your death benefit, up to the amount of cash value in your policy. Usually these loans are tax-free. What’s more, the interest rate charged by your insurance company for a policy loan is typically lower than the interest rate you would be charged by a bank or third-party lender. Depending on the rate of return you’re earning in your policy and the interest rate charged by your insurer, it’s possible to take out a policy loan and still have net positive interest earnings. In fact, there is one type of permanent life insurance that pays a guaranteed rate of return regardless of outstanding policy loans, essentially allowing you to borrow a dollar and earn interest on it at the same time.
When you pass away, the death benefit of your policy is paid to your heirs—not the cash value. But what you do with the cash value of your policy during your lifetime plays a key role in how much generational wealth you create. Many families use policies to pay for college education, purchase investment real estate, generate business capital or other purchases that increase the assets and earning potential of the family for generations. By utilizing tax-free loans with low interest and a rate of return that allows the policyholder to recapture interest costs, families save exponentially over the course of the policy. Permanent life insurance acts as a private family bank where you can keep more of your hard-earned money and earn more than you would holding it in a bank savings account.
Let’s talk about the three primary types of permanent life insurance and how they grow cash value for generational wealth: variable, universal, and whole life.
VARIABLE LIFE INSURANCE
Variable insurance policies grow cash value based on the performance of market-based accounts like equities, bonds, or money market accounts. The accounts are available to you depend on your insurer or broker. Your cash value can be invested in these accounts, and your wealth grows when the accounts do well. However, in the event of a market downturn, you may lose cash value.
If you have a healthy appetite for risk, variable life insurance may seem appealing. But if your primary goal is to grow generational wealth, it’s a gamble that might not be worth the cost. Variable policies tend to have high administrative and brokerage fees, and if investments don’t pan out, you may not be able to pass down the generational wealth you had hoped. The tax-free death benefit will still be there, but your ability to use policy loans for purchases that grow assets will be limited.
UNIVERSAL LIFE INSURANCE
Universal insurance policies grow cash value based on the performance of indexes, like the S&P 500, and investments held by your insurance company. Your cash value can be invested in these accounts or it can be held and earn a low, guaranteed rate of return. Should you choose to invest, when these indexes and investments do well, your policy’s rate of return reflects that performance. However, in the event of a market downturn, you may not earn anything. What’s more, universal policies may cap growth, regardless of how well an index performs, thereby limiting your earning potential.
Universal policies tend to be slightly less risky than variable policies and usually charge less in administrative and brokerage fees. However, because cash value may be subject to market volatility, a universal policy may not be the best vehicle to grow and protect wealth. It will pay out a tax-free death benefit, but if policy returns are limited, so is your ability to use cash value to grow generational wealth.
WHOLE LIFE INSURANCE
Whole life insurance policies earn a guaranteed rate of return, set when you purchase your policy. Rather than investing cash value in market-based accounts, it remains protected in your policy and there to use when you need it, while still earning guaranteed interest. There is no risk of losing cash value. On top of a guaranteed rate of return, policies purchased through mutual insurance companies also pay out non-guaranteed dividends. Most top-rated insurance companies have historically paid dividends for over 100 years, and they are often tax-free.
Whole life policies are the least risky type of permanent life insurance. Their guarantees facilitate growth of generational wealth because a policyholder knows just how much their policy will earn in a given year, with non-guaranteed dividends as an added bonus. A tax-free death benefit is guaranteed as well. This helps a policyholder budget for business and investment opportunities and family expenses like college tuition. Whole life insurance is also the type of insurance policy that may continue to pay a guaranteed rate of return in spite of outstanding policy loans, helping each dollar go further in growing generational wealth.
SUPERCHARGE WHOLE LIFE INSURANCE FOR GROWTH
For all its guarantees, some people are hesitant to purchase whole life insurance over a riskier policy because they’ve heard it grows wealth slowly. And they’re not wrong. Most whole life policies are structured for slow, steady growth—not ideal when your goal is to utilize cash value to build your assets.
However, there is a type of whole life insurance that can be supercharged for growth, exponentially increasing returns over the life of the policy, thereby increasing the spending power of your private family bank. It’s called a Wealth Maximization Account™.
A Wealth Maximization Account combines dividend-paying whole life insurance with a type of supplemental insurance called a paid-up additions rider (PUAR). Adding a PUAR to your whole life policy allows you to “overfund” it in the first several years of ownership. In fact, in as few as 7 years, a Wealth Maximization Account may earn enough in guaranteed cash value and non-guaranteed dividend payments that they cover the cost of premiums. PUARs can also be structured so that the policy is “paid-up” by the time you retire. And if you already own a variable or universal policy, you can structure a 1035 Exchange, where cash value in your existing policy is used to purchase a PUAR in one lump sum.
If you have a serious goal to grow generational wealth, dividend-paying whole life insurance with a PUAR is proven to be the fastest and safest financial tool to help you do it.
GROW GENERATIONAL WEALTH WITH PARADIGM LIFE
with a Wealth Strategist to create your perfect policy. As Wealth Strategists, we know Wealth Maximization Accounts work, because we all own them and use them to grow generational wealth for our own families. We source from the nation’s top-rated mutual insurance companies to find the best policy for your budget, with the guarantees you need to help make your financial goals a reality.