In this article:
- How Life Insurance Provides a Financial Safety Net
- How to Use Life Insurance to Bolster Your Legacy
- Can Life Insurance Help You Build Wealth During Your Lifetime?
Life insurance can provide more than just a cash payout to surviving family members. When used strategically, it can also be a powerful legacy planning tool. The right policy can offer a financial safety net for your family—and a way to grow your wealth during your lifetime. When you pass away, that wealth can then be passed on to your heirs.
How Life Insurance Provides a Financial Safety Net
When you take out a life insurance policy, you specify your beneficiaries. This is the person or people who will receive the plan's death benefit if you pass away while your policy is active. The size of the benefit varies from one policy to the next and can range anywhere from $5,000 to millions of dollars in coverage.
Your life insurance payout could go a long way if the unthinkable were to happen—especially if your family relies on your steady income to cover household expenses. Receiving an infusion of cash can help your loved ones:
- Avoid financial hardships and maintain their current standard of living
- Preserve their existing savings and avoid an erosion of wealth
- Avoid the need to liquidate assets to cover expenses
- Cover outstanding debts, as well as costs related to funeral planning
Your policy's death benefit can also provide peace of mind while your family grieves and adjusts to their new normal. Financial stress could make an already difficult time even harder.
How to Use Life Insurance to Bolster Your Legacy
The cash windfall from a life insurance payout can do more than cover essential expenses. Your loved ones might also use this financial flexibility to pursue new opportunities like:
- Buying a home
- Paying for education costs or pursuing an advanced degree
- Starting a profitable new business
- Covering costs associated with starting a family (medical deductibles, unpaid parental leave, infertility treatments and other needs)
- Funding a career change
- Contributing to charitable causes or starting their own nonprofit organization
Your policy's death benefit could bolster your legacy and leave a positive impact after you're gone. That can help your heirs elevate their financial health and build better lives for themselves—which may have a ripple effect that benefits future generations.
Can Life Insurance Help You Build Wealth During Your Lifetime?
The short answer is yes, but it depends on the type of policy you have. There are two main kinds of life insurance:
- Term life insurance: This provides coverage for a predetermined amount of time, which can last anywhere from 12 months to 30 years. You'll likely pay a fixed premium throughout the term. A death benefit will be paid out if you pass away during this time. This type of policy typically costs less than whole life insurance.
- Whole life insurance: This provides coverage for life and also pays a death benefit. What makes it unique is that a whole life insurance policy also accumulates a cash value during your lifetime. You can borrow against this amount as needed and pay it back, or take money out free and clear. Just be aware that your death benefit will be reduced if you don't replace borrowed funds.
It's possible to draw on your policy's cash value in a financially strategic way. For example, you might use this money to:
- Fund lucrative investments, from buying a rental property to strengthening your stock portfolio
- Start a business or breathe capital into an existing venture
- Pay off high-interest debt
- Pursue a degree that increases your earning power
These opportunities could grow your wealth during your lifetime—and ultimately strengthen the legacy you leave behind for your heirs. In this way, life insurance can be used as a tool for passing wealth from one generation to the next.
The Bottom Line
Being intentional about life insurance can help shore up your legacy and fortify your family's wealth. At the very least, your policy's death benefit can provide much-needed financial security during a difficult time. The right policy for you will depend on your risk tolerance and budget.
As you map out your estate plan, don't forget to tend to your credit. You can check your credit score and credit report for free with Experian.
