Unfortunately, most people think of death when they think about life insurance. And few want to think or talk about dying. As you may know, designated beneficiaries receive a financial benefit at the time of a person’s death. However, there are several benefits of life insurance to leverage while alive. Here is a look at a few life insurance wealth-building strategies that black families can use.
First, while there are numerous types of life insurance options available, they fall into the categories of term insurance, permanent insurance, or a hybrid:
Term Life Insurance
Term life insurance is the most economical because it provides coverage for a temporary time, like 10 years, 15 years, etc. Unfortunately, less than 1% of term insurance policies pay out. This is because people usually outlive the time frame of the plan.
Permanent Life Insurance
Permanent insurance provides coverage for a person’s entire life. Permanent life insurance policies build cash value. Cash value is a portion of the premiums paid that accumulates in a savings account. Over time, the accumulated cash earns interest and, in cases of mutual insurance companies (owned by its policyholders), dividends.
Universal Life Insurance
Universal life is a hybrid of term and permanent life insurance plans. Universal life or UL is a term life insurance plan that can protect the insured for their entire life. If this type of policy is not designed correctly, it can become a big waste of money. If the plan is designed and managed properly, it can be an economical way to have permanent life insurance coverage.
5 Life Insurance Wealth-Building Strategies
Financial experts in the insurance industry share a few wealth building strategies of life insurance to enjoy while alive, as well as for legacy wealth.
Build a Bank of You
Permanent insurance policies have a forced savings mechanism. This accumulation of cash, called Cash Value, is like building your own bank and can be used for numerous things.
“Instead of borrowing money from a bank,” explains Kerry Peabody, CLU, CLTC of Clark Insurance, “the policy owner can take a loan against the cash value for numerous things, like supplemental retirement income, college funding, business startup, etc.”
Benefit While You’re Alive
The most valuable asset a person has is their health and ability to earn money to save, spend, invest and give. However, if diagnosed with a terminal illness, medical expenses can wipe out a person’s savings or inhibit their ability to build wealth while they are alive.
“Some life insurance providers offer an accelerated death benefit rider, which is a provision that allows the policyowner to receive a portion of the death benefit if they were to become terminally ill,” says Yogesh Shetty of Live Well & Earn Insurance. “If diagnosed with a terminal illness, you could cash out a portion of your life insurance to pay off medical expenses.”
[RELATED: Multiple Ways Life Insurance Can Build Wealth for Blacks and Community]
Forced Future Savings
If funds are tight, but life insurance coverage is needed and a seamless way to save money is desired, this type of term life insurance can be an excellent tool for wealth building.
“Return of Premium Term Life Insurance Policy is a great way to build wealth,” says Sa El, co-founder of Simply Insurance. “If the person outlives the term, the Return of Premium Life Insurance Policy will return all the premiums paid into the policy. It is like having protection with cash back.”
Create Trust Babies
Whether people have substantial or modest incomes, life insurance is a way to create trust babies and legacy wealth. A trust is a fund that consists of assets held by a designated trustee for the beneficiaries. The trust owner dictates how the assets will be disbursed to the beneficiary, from the grave, through the trustee.
“Once the Trust is established, the trust owner can designate the beneficiary, the disbursement terms, and the trustee.” El further explains, “A person gets 30 times their annual earned income of life insurance. For example, $50,000 income per year would equal to a $1.5 million term life insurance policy. They then establish the trust fund as the beneficiary of the life insurance policy and then designates the beneficiary of the trust. This strategy can change the financial landscape of a family and put them in a financially stable position.”
Use Cash Value as Collateral
Whether there is a need for capital for a business startup or business renovations, many minority business owners are having trouble getting approved for small business loans.
“Permanent life insurance policy cash values can be used as collateral for bank loans,” shares Adam Doran, a financial advisor at Prevail Innovative Wealth Strategies. “Even if the bank does not offer, ask if this option can be considered.”
Life insurance is not only a financial benefit to the family upon death; it can be a tool to enhance an investment portfolio and financial plan. Consult with a registered financial adviser or licensed insurance agent for tax and eligibility requirements.
Black Enterprise Contributors Network