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How to use life insurance to build wealth

Happy couple talking with their financial advisor in an office meeting.
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Life insurance can do more than protect your loved ones from financial strain when you die. It also can help you build wealth. Thoughtfully purchasing coverage gives you the ability to build wealth during your lifetime. Additionally, it can help your family build generational wealth after you pass away.

Here's a closer look at the different types of life insurance and insight into how to use life insurance to build wealth.

Types of life insurance

The two basic categories of life insurance are term and permanent. Term life insurance lasts for a predetermined number of years, then expires. Meanwhile, permanent life insurance can last for a lifetime, no matter how long you live, as long as premiums are paid and the policy retains its value. Thrivent offers three types of permanent life insurance: whole life, universal life and variable universal life.

Term life insurance can help your family build generational wealth if you pass away during the contract term. Term provides the most death benefit per dollar of premiums and is a great tool for clients who need to save for additional financial goals.

Permanent life insurance offers a guaranteed death benefit as long as you pay your premiums and the policy retains it's value. This can provide your loved ones with a sizable payout upon your passing. But that's not the only advantage this type of coverage offers. Permanent life insurance may give you the opportunity to earn dividends and potentially grow cash value during your lifetime.

How to leverage life insurance to build wealth

Fixed cash value life insurance can help you build wealth when you use it as a separate asset class in a diversified financial portfolio. Of the three types of permanent life insurance mentioned earlier, only whole life offers fixed cash value. The cash value of universal and variable universal life contracts can change.

For the rest of this article, we'll be focusing on whole life insurance with accumulated value (another word for cash value) that is fixed.

Unlike stocks, bonds, mutual funds and real estate, the cash value of a whole life insurance contract does not fluctuate with market changes. Instead, it increases at a guaranteed rate. The increase in value is tax-deferred, and you can borrow against your cash value without incurring taxes, though different tax rules apply if your life insurance is a modified endowment contract.

Withdraw cash value from your life insurance contract

You may be able to withdraw or borrow against your contract's cash value during your lifetime. These options can help reduce your overall portfolio's market risk by giving you a noncorrelated asset to tap in a volatile market. In other words, if you need money and don't want to sell stocks because the market is down, you could borrow from your contract's cash value instead.

This money can be used however you wish, such as purchasing other appreciating assets that can be left to your loved ones, beneficiaries and favorite causes upon your death. Just keep in mind that taking money out can reduce your contract's death benefit by the amount you have not repaid.1

Distributing the life insurance death benefit

Along with helping to build wealth during your lifetime through potential cash value accumulation, life insurance can help to build generational wealth after your passing thanks to the death benefit. Your insurance carrier will send the contract's death benefit proceeds directly to your named beneficiary or beneficiaries, avoiding probate. In most cases, the benefit will not be subject to income tax. However, death benefit proceeds may be subject to state and federal estate or inheritance taxes.

How cash value accumulates in whole life insurance

Cash value accumulates over time in two ways:

  • A portion of each premium you pay adds to your contract's cash value.
  • Your cash value earns a guaranteed rate of return.

Cash value accumulates slowly when you haven't had your contract for very long. More of your premium goes toward insurance than toward cash value at first. Over time, more and more of your premium goes toward cash value. 

Creating a lasting legacy with life insurance

Strategically using life insurance to build your cash value and using that money to create more wealth is a great way to establish a legacy that will last long after you've passed. Thrivent's life insurance calculator can help you assess your needs and help you identify the right option for your individual situation.

Talk to a financial advisor about whether fixed cash value life insurance could help you meet your goals. A Thrivent financial advisor can explain and illustrate your different life insurance options so you can protect those you love and help them build the wealth that will allow them to live out their values.

1Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.
While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.

Under current tax law, IRC Sec. 101(a)(1), death proceeds are generally excludable from the beneficiary's gross income. However, death proceeds may be subject to state and federal estate and/or inheritance tax.

The primary purpose of life insurance is the death benefit protection. Loans and withdrawals will decrease your death benefit and the cash value available to pay insurance costs. Loans and/or withdrawals may cause a contract to lapse or terminate without value. Loaned values may accumulate at a lower rate than unloaned values.

A significant taxable event can occur if a contract terminates with outstanding debt.

Loans and partial surrenders on contracts classified as modified endowment contracts are taxed on gains coming out first and may be subject to a 10% penalty tax if made prior to age 59½.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.