Congrats on thinking ahead to being a generational wealth builder! You might be putting money into your savings account or starting your retirement account, but do you have life insurance? Hear us out on this.
There may be some things about life insurance that you haven’t heard from friends and family or online. While your favorite aunt or that trendy influencer might not know it, the truth is, life insurance can be much more than a source of cash to cover funeral expenses.
The right policy can serve as a financial lifeline that you and your family can tap into even prior to your passing. If you allow your policy to build cash value1 over time, you can withdraw money when you need it—like for the down payment on a house, to help pay for your child’s college education or even to put money into a business. Here’s what to keep in mind as you consider your options.
Know the difference between term and permanent life insurance
Life insurance policies fall into two big categories: term and permanent. Term life insurance only provides coverage for a certain amount of time—like 20 years. If you pass away during your coverage period, the life insurance company pays a death benefit to your beneficiaries. If you don’t, there’s no payout. That helps make term life insurance less expensive.
But permanent life insurance provides coverage for your entire life, no matter when you pass, as long as your coverage is active. Yes, it’ll provide a death benefit, but it also gives you more opportunities to build a legacy and solidify your financial health. The most common form of permanent life insurance is whole life insurance, which builds cash value over time.
Before you take out any insurance policy, you should talk with a financial professional to figure out how much coverage you need, the most suitable type for you and the length of time you’ll need the coverage. Your cost or “premium” depends on things like your coverage amount, age, and health. Typically, the younger you are, the more affordable your premium is—that’s why a good time to apply for insurance is now!
Learn how life insurance creates a family safeguard after death
Both term and permanent life insurance options will pay your loved ones a death benefit upon your passing (as long as the policy is still in effect). Not only can life insurance help your family avoid depending on a GoFundMe or taking donations to pay for a funeral, it can also help protect their well-being. For example, your insurance payout could give loved ones the funds to stay in the family home while they grieve, even if they don’t bring in enough cash to afford it on their own. It could also help pay for things like:
- A mortgage
- Credit card debt
- Childcare costs
- Tuition bills
- Student loan debt
As you can see, a large death benefit can reduce the financial burden on your family. And they generally get the money tax free.
Learn how life insurance can be a cash source throughout your life
If you opt for whole life insurance, the cash value of your policy is guaranteed to grow year over year. As you make payments toward your premium, you can then access that cash via a withdrawal or loan.1 This cash value can be really powerful if you need to pay for major expenses such as expanding your business or paying for a wedding. You can avoid the hassle of applying for a bank loan for these expenses, and you can avoid the chance you won’t get approved.
Much later in life, cash value can help boost your retirement income. And since whole life insurance doesn’t rely on the stock market, your policy isn’t affected by a market downturn.
Here’s an important note: if you don’t pay that loan back before you pass, including any interest, your death benefit will be reduced by that amount. Just another reason to have a financial professional in your corner who can advise you along the way.
Consider policies for the whole family
Remember, you aren’t the only one in your family who can get life insurance. Ensuring all your loved ones are protected, including babies and elders, can provide even more financial stability.
If you have kids, you can give them a head start on coverage, lock in a low premium, and prevent them from becoming ineligible for life insurance. Becoming ineligible could occur due to potential future negative health conditions or lifestyle factors such as engaging in extreme sports or obtaining high-risk occupations. This is because the terms of the policy are set based on the applicant’s risk profile at the time of the application. And generally, we are healthiest when we are young. So, you can give your children a head start with their financial plans by getting them a policy while they are young and healthy.
You also might want to check in on your parents. If they haven’t saved enough for retirement or their end-of-life expenses, you can work with them to take out a life insurance policy that names you as the beneficiary. This can help you avoid cutting into your own savings account for their funeral costs or outstanding debts. Sure, it’s a little awkward, but it’s definitely worth it.
Learn how to build generational wealth with a financial pro
Depending on your goals, it may be wise to have a combination of term and permanent life insurance to maximize your coverage and make payments more affordable. Talk with a financial professional who can help you customize your life insurance.
Learn more about building generational wealth with Northwestern Mutual.
This article is part of a paid program.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM) (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries in Milwaukee, WI. This article is not intended as legal or tax advice. Consult with a tax professional for tax advice that is specific to your situation. Not all Northwestern Mutual representatives are advisors. Only those representatives with “Advisor” in their title or who otherwise disclose their status as an advisor of Northwestern Mutual Wealth Management Company (NMWMC) are credentialed as NMWMC representatives to provide advisory services.
1The primary purpose of permanent life insurance is to provide a death benefit. A policy’s cash value typically becomes a useful source of funds only after several years of premium payments, which allows the cash value to build up. Using cash value will reduce the death benefit and may affect other aspects of the policy.
