- As a financial planner, I have seen the term âgenerational wealthâ gain popularity in recent years.
- To build generational wealth, I recommend choosing the right life insurance policy to pass on funds.
- I also recommend having a comprehensive estate plan in place to make sure your assets end up in good hands.
- Read more stories from Personal Finance Insider.
The term “generational wealth” has spread widely in recent years, but what is it and how do you start to build it? Like many other things in life, the definition depends on each individual. One person might think that generational wealth means leaving a substantial amount of money in a trust account for heirs, while another might define it as providing financial flexibility to heirs by leaving a home without a mortgage. One person could leave a lasting business to their heirs to operate or sell, while another person could focus on helping their adult children pay for major life expenses (for example, a wedding, a down payment on a house, seed capital to become an entrepreneur, etc.).
No matter how a person defines it, there are ways to achieve this goal. This article provides two steps someone can take to get started on the path to building generational wealth. Depending on the person, each of these areas can range from relatively simple to extremely complex. For the purposes of this article, I’ll focus on the basics and provide examples of how setting up this foundation can actually lead to the ultimate goal of generational wealth.
1. Ensure the right life insurance
Clearly and straightforward, life insurance (when structured correctly and appropriately for the individual) is a great financial tool that can be a catalyst for generational wealth creation. It is not the purpose of this article to discuss the amount and type of life insurance. The point here is to show how valuable life insurance can be in any financial plan. Consider the following two examples.
Life insurance to cover tuition fees
Mike and Sarah are both successful in their careers, but neither of them grew up in a household that had a lot of money. They got married three years ago and just had a son named Jack this year. On the recommendation of their financial planner, they both purchased relatively high value life insurance policies. This decision was made to ensure that there would be sufficient financial capital to provide for their son’s education needs (which includes school fees) in the event one of them dies prematurely.
Sadly, Mike faced serious health problems and died. Sarah is devastated, but throughout her grieving process, she has no financial worries because Mike’s life insurance policy is making her a lot of money. In the event of one of their deaths, the plan was to use part of the life insurance to establish an account specifically to fund Jack’s future tuition. Sarah knows that generational wealth creation has started for Jack as he will no longer be responsible for student loans in the future, which will give him much more financial flexibility to grow his own wealth.
Life insurance to start a business
John and Mary have been married for over 50 years. They have two adult children and five grandchildren. They faced tough times with finances throughout their lives, but made having life insurance a priority because they wanted to do something of financial impact for each of their grandchildren.
Sadly, John dies after battling an illness for years. His grandchildren were the beneficiaries of his life insurance policy and each received a portion of the death benefit. Barbara, one of her grandchildren, always wanted to be an entrepreneur, but never felt like she had the financial flexibility to do so. When she received the money from John’s life insurance policy, Barbara used it as start-up capital for her business, which she knows will be very successful and will also provide her with the opportunity to start. generational wealth.
2. Good estate planning
I think it’s safe for people to consult with an estate planning lawyer to at least establish the basic documentation, which includes a will, living will, and power of attorney. When it comes to generational wealth, having a properly executed will is very important as it coordinates the distribution of your assets after death. The use of a will adds efficiency to the transfer of specific assets to the next generation. In other words, the goods will reach the person or persons according to the wishes of the deceased. Consider the following example.
Harry never married and has no children, but he has accumulated substantial wealth throughout his life. In order to offer financial flexibility to his nephew, Larry, he would like to offer him a house, which is fully paid off. Harry executed his will stating that upon his death Larry will now be the owner of the house. As a result, Larry will have the opportunity to live somewhere and not have to pay a mortgage, which ultimately allows him to free up some money to build generational wealth.