While you may think of life insurance as simply a way to help protect loved ones from financial insecurity, a well-structured cash-value life insurance policy can do much more than that. In fact, the flexibility of cash-value life insurance can help maximize the wealth transfer from one generation to the next, equalize an inheritance between siblings, take care of children with special needs, or even help you with expenses while you’re living.

Why cash-value life insurance?

There are two main types of life insurance: term and cash-value. A term policy offers temporary protection that lasts a specific period of time, such as 10, 15, or 20 years, and provides the beneficiary with a lump-sum payment if the insured dies during that time. It may be used to protect younger families just starting out, or those who need short-term coverage such as the ability to pay off a mortgage or provide funds if the breadwinner dies while children are in college.

On the other hand, cash-value life insurance can provide protection for a lifetime, which can make it an efficient and effective component of a wealth transfer plan. While premiums may be significantly higher for a cash-value policy than a term policy, it may offer additional benefits, such as the ability to allocate premiums in investment options, fixed accounts or indexed accouts, potentially grow the policy's cash value and potentially access policy distributions (policy loans or withdrawals) for unexpected expenses or to help supplement retirement income.

The flexibility of life insurance in generational wealth transfer

If your goal is to maximize how much you leave the next generation, cash-value life insurance can play an important role in your wealth transfer plans. Because this type of life insurance is flexible, it can be used in a variety of ways.

1. Help protect generational wealth — Life insurance allows you to transfer and wealth to your children or grandchildren by designating them as beneficiaries of your policy or establishing a trust that will benefit them in the future. In addition, life insurance proceeds are generally free of income tax to the beneficiary¹.
2. Reducing estate tax liability — If your estate is large enough, your heirs may need to pay estate taxes, reducing the amount they will inherit. However, life insurance proceeds can provide the liquidity to pay estate taxes and other estate expenses, thus helping to maximize the amount going to heirs².
3. Equalizing inheritance — Because policyowners have the flexibility to change beneficiaries of a life insurance policy as life circumstances change, you can use life insurance to equalize an inheritance between children or other loved ones. This can be beneficial if you have other assets that are difficult to divide, helping to reduce potential conflict between family members and ensure a fair distribution of wealth.
4. Taking care of those with special needs — If you are a parent of a special needs child, naming them outright as a beneficiary of a life insurance policy may be problematic. However, cash-value life insurance can be used to fund a special needs trust for the benefit of your child. Working with your financial professional, you would set up a trust, establish how you’d like the life insurance proceeds to be used upon your death, and name a trustee to oversee the asset distribution. In this way, a wealth transfer plan with life insurance can help ensure that your special needs child is taken care of if something happens to you.
5. Using it for yourself — What happens if your situation changes, and you need some extra money to help pay for long-term care expenses for yourself or other major unexpected expenses? This doesn’t have to throw off your wealth transfer plans. Structured appropriately, cash-value life insurance offers the flexibility to access your policy's available policy cash value, through loans and withdrawals.  if the policy comes with certain accelerated death riders, the policy death benefit may also be available while you are still alive³.

As you look ahead to providing for the next generation, consider speaking to your financial professional to see if a cash-value life insurance policy may be a good addition to your wealth transfer plans.