Last posted by Robert Chittick | LHElink.com
Gain financial protection and help maximize the money you pass along to heirs.
There may come a time when you may need to think about the future generations of your family. You have worked hard, accomplished your goals, and accumulated funds to support a comfortable retirement. Along with your careful planning, maybe you would like to set aside funds to pass along to your children or grandchildren. Whether the amount is a little or a lot, wouldn’t it be nice to help ensure those funds are passed along in a tax-efficient manner? This would help maximize the money you can provide to your heirs. Life insurance provides death benefit protection and can help increase the value of the funds you pass along to beneficiaries
Legacy building, also referred to as wealth transfer, is simply a plan using life insurance to pass along money to your beneficiaries in a way that’s most favorable for them and for you.
Why life insurance?
Life insurance provides a death benefit, which can help provide financial security to beneficiaries generally income tax-free. For legacy building, life insurance offers the same two key benefits:
- It helps to provide financial protection and passes along a generally income tax-free death benefit.
- It can help maximize the funds you pass along— whether it’s for your children or grandchildren, a church, or perhaps a charity.
If you have set aside funds, you owe it to yourself to explore how life insurance can help efficiently pass those funds along to your beneficiaries.
Who can benefit?
There are a few items to consider before deciding on a legacy building strategy using life insurance. Importantly, legacy building should only be considered if you have funds available to support yourself throughout retirement. Those who have money already set aside for heirs typically consider a legacy building strategy. These assets are often held in low interest-earning accounts, which may not be a tax-efficient method for transferring wealth.
Here are a few questions to help you determine if the strategy is right for you:
- Are you within the retirement ages of 55-75?
- Are you financially sound, with your own retirement plan?
- Do you have children, grandchildren, or an organization you’d like to benefit?
- Are you holding funds designated to leave to heirs or children—certificates of deposit (CDs), savings accounts, or money market accounts, especially accounts designated as “payable/transfer on death” or POD/TOD?
- Have you named your heirs joint owners of your assets?
- Do you have an annuity you’d like to pass along to heirs?
- Are you taking required minimum distributions (RMDs) but don’t have a current need for the funds?
- Are you looking for tax-advantaged solutions to transfer funds?
- Immediate death benefit protection. From the start, you gain death benefit protection that will be paid out to your beneficiary upon death.
- Income tax-free transfer to heirs. When you die the death benefit passes generally income tax-free to heirs.
- Leverage. With life insurance, your premium payments can provide a larger death benefit immediately after issue. For example, if you purchase a $250,000 life insurance policy, that full amount would be paid as a death benefit once your policy is put in force. If your first premium payment is $1,500, for example, those dollars are “leveraged” immediately into the full $250,000 death benefit. These premium dollars purchase the full death benefit amount that would be available upon death.
- Tax-deferred growth. The premium payments into a permanent life insurance policy may earn interest and grow on a tax-deferred basis.
- Liquidity. Should your needs change or in an emergency, you may access the funds in a life insurance policy through loans or withdrawals.
How does it work?
When properly structured, a legacy building plan can help you gain death benefit protection and maximize the funds you leave to heirs.
- Establish whether the strategy is appropriate for you and that you need death benefit protection.
- Locate the funds you would like to pass along to your beneficiaries. These funds represent assets you don’t plan to use for retirement. The funds may be in a CD, annuity, IRA, or savings or checking accounts.
- The designated funds are then used to purchase a life insurance policy. This may immediately increase the amount available in the form of a death benefit. Consult your representative about methods of transferring funds into the life insurance policy.
- Upon death, the funds from the life insurance policy are passed along to beneficiaries in the form of a death benefit—passing along a legacy.
It is important to explore your options and to work with your representative to gain a clear picture of your needs. The goal is to help you decide on an appropriate direction. There are costs with life insurance. Permanent life insurance policies require monthly deductions, which include the cost of insurance, expense charges, and potentially other charges. These deductions may reduce the cash value of the policy.