How to Leave an Inheritance with Life Insurance
Leaving an inheritance doesn’t have to be a matter of saving a fortune or bottling your retirement fund.
With the right life insurance strategy, you can live freely knowing that you will be leaving a notable sum of money behind to your heirs when you die.
Having helped countless clients secure an inheritance for their loved ones through life insurance. Our independent agency offers a complete guide to help you unlock the possibilities you might be missing.
Here’s what we'll cover in this post:
Quick Article Guide
Here’s what we'll cover in this post:
What is Universal Life Insurance? (UL)
If you’re buying life insurance for inheritance purposes, you will likely want a universal life policy that guarantees coverage to a very late age. Universal life insurance is categorized as a form of permanent life insurance, because it provides protection for your entire life.
There is also another type of permanent coverage called whole life insurance; universal life is typically more affordable and offers more flexibility than whole life. A UL policy can be adjusted, while whole life premiums are locked in for the length of the insured’s lifetime.
When you purchase a universal life policy, you can customize it to the age of your choice: 90, 95, 100, 105, 110, or even 121.
Non-Guaranteed Universal Life Policies to Be Wary Of
Many universal life insurance policies are far more complex than the average consumer cares to understand. When you see that a policy comes with “cash accumulation” or “cash value,” take it as an immediate red flag.
Cash accumulation in life insurance is essentially an investment, and all investments carry some sort of risk. That’s why these types of policies are called “non-guaranteed.”In theory, you build the cash value in your universal life insurance and accrue interest. What you have to worry about with a non-guaranteed policy, though, is the possibility of your investment underperforming and eating away at your cash value–without you realizing until you hit zero.
Cash accumulation is not a growing money tree. It is designed to cover your cost of insurance and mortality risk charges, which increase as you age and become more of a “risk” to insure.
Here are a couple of the somewhat “dangerous” universal life policies that many agents will overhype:
Indexed Universal Life (IUL)
With an indexed universal life policy, you’re basically “participating” in the stock market without being fully tied to it. IUL is a hot product right now, but that doesn’t make it a sound investment. In fact, we’d even go as far to say that it’s a little sketchy.
In 2014, the State of New York’s insurance regulator probed 134 insurers on how they market such policies out of concern that they were exaggerating the potential gains to consumers. After continued scrutiny, IUL was hit in 2015 with regulations that the Wall Street Journal called, “A Dose of Reality for a Hot-Selling Insurance Product.”
We provide a deeper dive into the risks of indexed universal life insurance here.
Variable Universal Life (VUL)
As Investopedia explains, variable universal life insurance “usually includes sub-accounts, which function very similar to mutual funds and can provide exposure to stocks and bonds. This exposure offers the possibility of an increased rate of return over a normal universal life or permanent insurance policy.”
The key word there is “possibility.” We recently received a call from a new client who had a VUL since 1996. His insurance company had contacted him stating that his policy needed an additional $10k in funding to avoid a lapse in coverage, because his “possibility” of a high return had swung the opposite way.
Even after paying the $10k, his annual cost of coverage has gone up substantially, rendering the policy unaffordable. Being in his 70s and not in the best of health, there are limited viable options available—this at a time when he needs coverage the most. The VUL’s rate of return failed to produce the necessary funds to keep the policy affordable.
Pro Pick: Guaranteed Universal Life Insurance (GUL)
Aside from being risky up front, cash accumulation is not really your money in any way. If you borrow from it, you have to pay it back with interest–otherwise the outstanding loan balance when you die is subtracted from your death benefit. And if you save the money, it does not go to your family upon your death–the insurance company keeps it.
For these reasons, we recommend steering clear of cash accumulation altogether. True to its name, GUL insurance provides guaranteed rates and coverage which is ideal for leaving an inheritance. There is no cash value or investment vehicle attached to the policy so you only pay for the coverage you need.
Take a look at the non-guaranteed vs. guaranteed universal life “cheat sheet” below:
Laddering with Term Life and GUL
We often find that buying guaranteed universal life insurance alongside term life insurance can be a viable means of covering all debts, without having to overpay for life insurance.
The term life policy is used for current coverage needs–such as a mortgage, income replacement and raising children–and is later shed at a time when the insured would expect to no longer have those needs (i.e. mortgage paid off, retirement income coming in and children graduated from college). Meanwhile, the GUL policy provides lifetime protection.
For Example: If you want to leave $150k to your heirs, but currently need $500k worth of coverage, you could buy a $350k face amount term policy with a $150k face amount GUL policy. Referred to as “term laddering” or “term layering,” this strategy is especially useful for those who are in good health and able to lock in favorable rates. Even though you’re paying for two policies, you’re saving money compared to if you were to buy a $500k GUL policy.You can learn more about term laddering or layering your life insurance coverage here.
Life insurance can also help you leave an inheritance by enabling you to “double down” on your retirement income. If you have a pension plan, you can use a strategy called pension maximization to accept your full payout instead of the reduced spousal benefit, while supplementing with life insurance to provide the same protection for your spouse.
Sound interesting? Check out our pension maximization guide to learn more about this common strategy.
Protect Your Estate
For those who own a large estate, you are probably all too familiar with the high taxes above the state exemption. You can equip your heirs with the financial resources to be able to keep the estate after you pass and effectively shield them from hefty estate taxes by using life insurance to set up an irrevocable trust.
We know estate planning can be difficult, so we’ve created an estate tax calculator to help you gauge how much life insurance you should buy in order to keep your property in the possession of your loved ones after you die.
Love Your Golden Years
Life insurance isn’t always about dying. In fact, it can help you live a happier life once you’re retired. After decades in the workforce, you’ve earned your right to travel the world, indulge in a few new luxuries, or just kick back and relax with your family.
You shouldn’t have to harbor your retirement savings in order to leave an inheritance, and with life insurance, you don’t have to. Learn how you can utilize life insurance to spend your retirement savings and leave a legacy, tax-free.
Don’t feel like clicking over to another tab? Here’s the example we used in the article to illustrate how life insurance can be a form of legacy:
“Mike, age 63, is preparing to retire in 6 months. His biggest fear is that he won’t have enough money in retirement to sustain the lifestyle his family has established. He just finished paying for his oldest daughter’s wedding, and his youngest daughter just got engaged.
About 15 years ago, Mike’s 401(k) was prospering and life was great. But little did he know the 2008 recession would negate his early retirement plans and leave his financial future uncertain. Mike knows he needs to do something, but is not interested in an investment because he doesn’t want to risk losing what he has worked so hard for.
While researching his options, Mike came across the idea of getting a life insurance policy with a fixed death benefit and fixed premium. He spoke with a licensed agent, who helped him secure a guaranteed universal life policy with a fixed $300,000 death benefit up to age 95, and a fixed premium of $374 per month.
Now, Mike is able to spend his retirement money guilt-free, the way it was intended, while still leaving the tax-exempt death benefit for his wife and two daughters. He likes the idea of having a fixed bill every month and knowing that the stock market cannot deplete the money he intends to pass down.”
Take the First Step
At JRC Insurance Group, we understand what leaving an inheritance means to you and your family, not just financially, but also emotionally. We’re not here simply to sell you life insurance; our purpose is to help you find the coverage that’s right for you.
We’re patient, passionate, and committed to providing a truly extraordinary client experience. Call us toll-free at (855) 247-9555 to speak with one of our agents today, or click the button below to get a free quote online.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.