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Using Life Insurance for Generational Wealth Transfer
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Five reasons to consider cash-value life insurance for transferring wealth to children or grandchildren.

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While you may think of life insurance as simply a way to help protect loved ones from financial insecurity, a well-structured cash-value life insurance policy can do much more than that. In fact, the flexibility of cash-value life insurance can help maximize the wealth transfer from one generation to the next, equalize an inheritance between siblings, take care of children with special needs, or even help you with expenses while you’re living.

Why cash-value life insurance?

There are two main types of life insurance: term and cash-value. A term policy offers temporary protection that lasts a specific period of time, such as 10, 15, or 20 years, and provides the beneficiary with a lump-sum payment if the insured dies during that time. It may be used to protect younger families just starting out, or those who need short-term coverage such as the ability to pay off a mortgage or provide funds if the breadwinner dies while children are in college.

On the other hand, cash-value life insurance can provide protection for a lifetime, which can make it an efficient and effective component of a wealth transfer plan. While premiums may be significantly higher for a cash-value policy than a term policy, it mayÌýoffer additional benefits, such as the ability to allocate premiums in investment options, fixed accounts or indexed accouts, potentially grow the policy's cash value and potentially access policy distributions (policy loans or withdrawals) for unexpected expenses or to help supplement retirement income.

The flexibility of life insurance in generational wealth transfer

If your goal is to maximize how much you leave the next generation, cash-value life insurance can play an important role in your wealth transfer plans. Because this type of life insurance is flexible, it can be used in a variety of ways.

  1. Help protect generational wealth — Life insurance allows you to transfer and wealth to your children or grandchildren by designating them as beneficiaries of your policy or establishing a trust that will benefit them in the future. In addition, life insurance proceeds are generally free of income tax to the beneficiary1.
  2. Reducing estate tax liability — If your estate is large enough, your heirs may need to pay estate taxes, reducing the amount they will inherit. However, life insurance proceeds can provide the liquidity to pay estate taxes and other estate expenses, thus helping to maximize the amount going to heirs2.
  3. Equalizing inheritance — Because policyowners have the flexibility to change beneficiaries of a life insurance policy as life circumstances change, you can use life insurance to equalize an inheritance between children or other loved ones. This can be beneficial if you have other assets that are difficult to divide, helping to reduce potential conflict between family members and ensure a fair distribution of wealth.
  4. Taking care of those with special needs — If you are a parent of a special needs child, naming them outright as a beneficiary of a life insurance policy may be problematic. However, cash-value life insurance can be used to fund a special needs trust for the benefit of your child. Working with your financial professional, you would set up a trust, establish how you’d like the life insurance proceeds to be used upon your death, and name a trustee to oversee the asset distribution. In this way, a wealth transfer plan with life insurance can help ensure that your special needs child is taken care of if something happens to you.
  5. Using it for yourself — What happens if your situation changes, and you need some extra money to help pay for long-term care expenses for yourself or other major unexpected expenses? This doesn’t have to throw off your wealth transfer plans. Structured appropriately, cash-value life insurance offers the flexibility to access your policy's available policy cash value, through loans and withdrawals.Ìý if the policy comes with certain accelerated death riders, the policy death benefit may also be available while you are still alive3.

As you look ahead to providing for the next generation, consider speaking to your financial professional to see if a cash-value life insurance policy may be a good addition to your wealth transfer plans.

* Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits.

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1 For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (i.e. the transfer-for-value rule); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).ÌýÌý
2ÌýAs of September 2024, the estate tax exemption is $13.61M per individual; source: , retrieved September 2024
3ÌýRiders will likely incur additional charges and are subject to availability, restrictions and limitations. When considering a rider, request a life insurance policy illustration from your life insurance producer to see the rider’s impact on your policy’s values.

Benefits paid by accelerating the policy’s death benefit may or may not qualify for favorable tax treatment under Section 101(g) of the Internal Revenue Code of 1986.ÌýTax treatment of an accelerated death benefit may depend on factors such as life expectancy at the time benefits are accelerated, the amount of benefits, the amount of qualified expenses incurred, or if similar benefits are being received under other contracts.ÌýÌýReceipt of accelerated death benefits may affect eligibility for public assistance programs such as Medicaid.Ìý When benefits are received from multiple policies providing long-term care or chronic illness benefits for a given insured, including policies with different owners, all of those benefits must be aggregated to determine their taxability. Tax laws relating to accelerated death benefits are complex.Ìý¾«¶«Ó°Òµ cannot determine whether the benefits are taxable.Ìý Clients are advised to consult withÌýqualified and independent legal and tax advisor for more information.

In order to sell life insurance, a financial professional must be a properly licensed and appointed life insurance producer.

Life insurance is subject to underwriting and approval of the application and will incur monthly policy charges.Ìý In general, additional premium is required to continue coverage of the policy. Policy may lapse if premium is insufficient to continue coverage.

¾«¶«Ó°Òµ, its affiliates, their distributors and respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.

¾«¶«Ó°Òµ is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

¾«¶«Ó°Òµ refers to ¾«¶«Ó°Òµ and its subsidiary ¾«¶«Ó°Òµ & Annuity Company. Insurance products can be issued in all states, except New York, by ¾«¶«Ó°Òµ and in all states by ¾«¶«Ó°Òµ & Annuity Company. Product/material availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.

The home office for ¾«¶«Ó°Òµ & Annuity Company is located in Phoenix, Arizona. The home office for ¾«¶«Ó°Òµ is located in Omaha, Nebraska.

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