Insurance Life Insurance Transferring Wealth With Life Insurance By Mila Araujo Mila Araujo Facebook Twitter Mila Araujo is a certified personal lines insurance broker with more than 20 years of experience in the insurance industry. She currently serves as the director of personal insurance for Ogilvy Insurance where she works with some of the world's largest insurers and manages the needs of thousands of clients with the help of her broker team. As an insurance expert, has written about homeowners, auto, health, and life insurance for The Balance. Mila received the Bernard J. Finestone Award in General Insurance from McGill University in 2001. learn about our editorial policies Updated on February 28, 2022 Reviewed by Samantha Silberstein Reviewed by Samantha Silberstein Twitter Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California Life, Accident, and Health Insurance Licensed Agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans. learn about our financial review board Fact checked by David Rubin Fact checked by David Rubin Facebook Instagram Twitter David J. Rubin is a fact checker for The Balance with more than 30 years in editing and publishing. The majority of his experience lies within the legal and financial spaces. At legal publisher Matthew Bender & Co./LexisNexis, he was a manager of R&D, programmer analyst, and senior copy editor. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Use Life Insurance to Build Wealth Strategies Used to Create Wealth Single Premium Life Insurance Building Financial Security Options for Life Insurance Cash-Outs Choices for the Elderly Tax Advantages Photo: vgajic / Getty Images People are always looking for ways to make more money or build wealth. Life insurance is one way to build wealth easily by using a life policy as part of a wealth transfer strategy to a beneficiary. If you are a senior or boomer, wealth transfer and asset protection is an important concept to learn about. However, this concept is not only limited to seniors, since younger people can use a similar strategy by setting up life insurance for parents, with the same concept in mind. Here is what you need to know about using life insurance as part of a strategy to build wealth. Key Takeaways Single premium life insurance creates an immediate death benefit after an initial deposit.Other policies have the option of an accelerated death benefit that can be drawn on to pay for long-term care coverage.Simplified underwriting allows many seniors to qualify for life insurance with no physical or blood work.One advantage of life insurance over other investments is that the entire death benefit is passed income tax-free to the beneficiary. How to Use Life Insurance to Build Wealth When you have money, you might be interested in using life insurance and other products to efficiently maximize the distribution of assets to spouses or partners, younger generations, and favorite charities. A will and/or a trust can assign assets to beneficiaries; however, these estate-planning tools are not designed to create wealth so much as they are to preserve it. If you don't have a lot of wealth built up or are looking for a plan to build wealth for your family, then a wealth transfer strategy using life insurance products may be one of the few ways to instantly create wealth and increase the amount passed on to a recipient or beneficiary. People of all ages use life insurance for different needs. Learn more about different types of life insurance products with examples of how you can use life insurance at different life stages here. Strategies Used to Create Wealth With Life Insurance A financial planner and life insurance agent can help you review what options will work for you, however here are three examples of how some use life insurance to create wealth: People purchase life insurance so that when they die their family or beneficiary will receive the death benefit. People can take out a life insurance policy on someone else, like their parents, and make themselves the beneficiary so that when the insured person dies they receive the death benefit. However, in order to do so, the beneficiary is generally required to (1) obtain permission from the insured person and (2) demonstrate an insurable interest (proof of exposure to financial loss as a result of the insured’s death). People who want to sell their life insurance policy to access the money early may obtain a partial settlement if they need access to the money early. This is not really a wealth creation strategy, but it is an example of accessing the wealth in a life policy early. The life insurance settlement firms who buy the policy, however, usually do so for a profit. Ideally, if you want to benefit from your own life insurance policy directly by accessing money early, you can learn more about better ways of doing this than selling your policy here: What Is Cash Surrender Value? Single Premium Life Insurance and How It Works Single premium life insurance is a valuable investment when it comes to wealth creation and transfer. With this type of life insurance, a single premium is deposited, creating an immediate death benefit that is guaranteed until the owner passes away. The death benefit will depend on the amount deposited, gender, age, and health of the insured. In many cases, the single deposit will be multiplied by a factor of two or more when the death benefit is calculated. Typically the younger the insured, the higher the benefit received. For instance, a 65-year-old healthy, non-smoking woman who deposits $100,000 into a single premium life policy could pass $200,000 or more in death benefit to her beneficiaries. Moreover, the benefit is income tax-free to her recipients. Building Financial Security With Single Premium Life Insurance Single premium life insurance can also benefit the insured or the purchaser during his or her lifetime. The cash value in a fully funded policy will grow quickly and can provide income to the purchaser if needed. In turn, the purchaser can also surrender the policy for its cash value at any time. A few policies guarantee the cash value to be no less than the one-time deposit. This way, if the insured needs to surrender the policy due to unforeseen circumstances, he or she is guaranteed to get the investment back. The insured also has the option of taking a loan against the policy instead of surrendering the contract if desired. Options for Life Insurance Cash-Outs Other policies have the option of an accelerated death benefit that can be drawn on to pay for long-term care coverage. By invoking this rider, the woman in the example above would have $200,000 available to her for long-term care expenses in her home or a nursing home facility- and these benefits could be received income tax-free. In this example, she avoids premium payments into a traditional long-term care policy and still rests assured that she has significant nursing home protection if necessary. The insurance policy improves the estate in two ways. The life insurance policy will pass increased wealth to the beneficiary or protect an estate from the considerable costs associated with long-term care. There are various investment options in single premium life policies. The most common policy, traditional whole life, has a guaranteed interest rate which makes it very dependable. Other policies such as universal life have different interest rate structures and can use an equity-index or variable engine to increase the policy value. Choices for the Elderly Many elderly consumers feel that they are not healthy enough to purchase life insurance in their golden years. This is simply not true. Simplified underwriting allows many seniors to qualify for life insurance. With simplified underwriting, there is no physical or blood work needed. Underwriting can be done using the answers on the application and a quick telephone interview. The fact is single premium life insurance is not difficult to purchase. Those who feel they are in extraordinary health can choose to go through advanced underwriting and may qualify for increased insurance benefits. Tax Advantages One advantage of life insurance over an annuity, a savings bond, a certificate of deposit, or other investment is the favorable tax treatment of a life policy. The entire death benefit is passed income tax-free to the beneficiary. However, the death benefit can count toward the gross value of an estate for estate tax purposes. To avoid estate taxes, some policies are owned by the beneficiaries or an irrevocable life insurance trust. It is crucial to work with a knowledgeable agent, financial planner, and attorney if estate taxes are a concern. Often single premium life is considered a modified endowment contract, or MEC, by the IRS. The policy can be taxable to the owner if gains are withdrawn—just like an annuity or savings bond can be taxable to the owner. It is important to choose a well-rated company and an informed advisor to select the best possible policy for your future. Life insurance can be one of the most dependable investments for many families and is well worth considering if you are looking for ways to build wealth. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Western & Southern Financial Group. "Legacy Forward II," Pages 2-4. Western & Southern Financial Group. "Legacy Forward II," Pages 3-6. Western & Southern Financial Group. "Legacy Forward II," Pages 3, 6, 8. State Farm Mutual Automobile Insurance Company. "Single Premium Life Insurance - A Lifetime of Benefits, Just One Payment." Prosperity Life Group. "Single Premium Universal Life Insurance." Fidelity Life. "Simplified Issue Life Insurance." Internal Revenue Service. "Life Insurance & Disability Insurance Proceeds." United States Code. "26 USC 2042: Proceeds of Life Insurance." Internal Revenue Service. "Abusive Trust Tax Evasion Schemes - Special Types of Trusts." Internal Revenue Service. "Rev. Rul. 2005-6," Pages 1, 5.