Often when we think of life insurance, the idea of using a policy to build wealth doesn’t necessarily come to mind. Perhaps this is because of the sensitive nature of life insurance or stigma around the idea of generational wealth.
Either way, using life insurance as a wealth-building tool is actually something people have been doing for a long time. Keep reading if you’d like to know some simple strategies you can use to transfer wealth to your family.
Estate planning with a life insurance policy
Recently, we’ve discussed how to decide if you need life insurance. If you’ve made the decision to take out a policy or perhaps already have a policy, it’s still important you have a complete estate plan.
Taking out a policy is just part of the process. If you want to make sure your family are well-looked after, it’s important you put all necessary measures in place. The benefits of estate planning in advance can help in so many ways.
One particularly positive outcome of planning ahead of time is that you can use a life insurance policy to protect and even build wealth for your family. This could allow them to thrive rather than just survive if the worst was to happen.
Which life insurance policies can be used to build wealth?
Strictly speaking, you can use a term policy or a whole-of-life policy to build wealth.
Some whole-of-life policies are ‘unit-linked’, which means there is an investment element to them.
However, a term policy can be just as effective under the right circumstances.
Important things to consider about a life insurance payout
If you have a life insurance policy that pays out, this may seem like a straightforward transaction. Unfortunately, it’s not as simple a process as you might hope.
Any money paid out would be added to your estate. This has two important consequences:
- It may take your family a long time to be able to access the money if there is a lengthy probate process.
- Your family may be subject to a large Inheritance Tax (IHT) bill if the insurance proceeds push your estate value over the personal threshold.
How to use life insurance to protect wealth
Thankfully, there are some simple steps you can take to overcome these obstacles.
In order to protect your wealth, you can have your life policy written in trust. This is a legal document that names the beneficiaries of the policy in advance. Doing this places the policy outside your estate.
This means it won’t be subject to Inheritance Tax. Also, your family can access the money quicker and use it in its entirety to cover some (or all) of any costs. This could be taxes, financial obligations or even funeral expenses.
If you already have a life insurance policy that wasn’t written under trust, fear not. It still might be possible to arrange. However, it’s important to note that this would create a Potentially Exempt Transfer (PET). So the proceeds may be subject to a certain amount of Inheritance Tax if you were to die within seven years of transferring the policy.
Using life insurance to build wealth
Along with mitigating your estate costs, life insurance proceeds can put your family in an excellent financial position.
It’s important that you take steps to educate any potential recipients of the payout. The lump sum might be a large amount of money, so it’s important they know what to do with it.
Setting them up with a stocks and shares ISA could be a good way for them to invest some of the proceeds in a tax-efficient way.
The money could also be used for a larger purchase, such as a real estate investment. Or you could simply introduce them to a good financial planner who can sit down and advise them when the time comes.
The most important thing to keep in mind is that this money will give your family options.
A life insurance policy written under trust can be an effective way to protect your wealth and look after your family.
With proper planning, your family can not only use the policy proceeds to cover costs, but also put the money to work to build lasting, generational wealth.
Life insurance policies and trusts can be a complex subject, so it’s important you speak to a financial adviser and a solicitor if you want to assess your options.
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