Movies often depict people who leave behind millions of dollars to their grandkids, locked away in trust funds, so they can enjoy the good life. Sound a little far-fetched for your family? The reality is, you could leave behind funds to make life a bit easier for the next generation.

To do that, you need to learn how to build generational wealth. Anyone can start building a financial cushion for their family that lasts beyond their own lifetime. Even if you’re a middle-income family, it’s still possible to create this type of security net for your children and even grandchildren.

There are well-documented differences in generational wealth among demographic groups in America, particularly race. A Brookings Institution study found that Black families have an average net worth of about $17,000 – 10 times less than White families.

Unsurprisingly, income also plays a big factor in the average family’s savings. According to Pew Research Center, upper-income families have 7.4 times more wealth than middle-income families and a staggering 75 times more wealth than low-income families.

Over the years, those gaps can grow bigger, making it difficult for future generations to meet milestones like owning a home or starting a business.

Why not take steps to help your family close this gap? Can life insurance help? Here’s some information on generational wealth and how to use life insurance to build wealth.

What is generational wealth?

Generational wealth refers to leaving an inheritance for the next generation, like your children or grandchildren. Passing down wealth from one generation of your family to the next allows you to leave something behind. Sometimes, this is referred to as family wealth or even a legacy.

There are many ways to leave behind wealth. That may include cash, but may also include stocks and bonds, real estate, or life insurance proceeds.

Generational wealth helps secure the financial future for your children, and often their children, as well as extended family. It’s not always possible to leave a large amount of money in the form of an inheritance to your family, but it is possible to give the next generation resources that can provide them a head start financially.

How to create generational wealth

Building generational wealth takes time and consistency. Establishing good financial habits and putting strategies into place early can help you create more opportunities for wealth-building. These tips can help you with building wealth and maximize your legacy for your kids and grandkids.

Eliminate Debt

Credit reporting agency Experian reports that the average U.S. adult had $6,501 in credit card debt in 2023. They also had an average of $19,402 in personal loan debt. Auto loans, student loans, and mortgages add to this figure, resulting in an average debt of $104,215. Eliminating this debt means saving money on interest, freeing up more funds for future investments. Make it a priority to pay down high-interest debts. For example, if you’re putting money into an investment account that earns 2% but your credit card interest rate is 17%, you’re actually losing money by not wiping out your debt first.

Buy a Home

Buying and paying off a mortgage loan on a home is one of the key ways to build generational wealth. Rather than putting money toward rent every month, you’ll eventually have an asset you own free and clear. Once you pass on, your family can choose to keep the home in the family or sell it to buy a place all their own.

Start a Business

When it comes to how to create generational wealth, building a business is one of the more complex but most rewarding options available. The investment in a business that becomes profitable through hard work and wise decisions can carry on from one generation to the next indefinitely. Whether it’s flower arranging or bookkeeping, establishing a business you’re passionate about and investing wisely in it could create opportunities for your family for years to come.

Invest In the Market

You don’t have to be a stock market guru to start investing. Opportunities like 401(k)s can help you minimize risk and take advantage of tax breaks to make your money grow faster. The sooner you start investing, the better. The power of compound interest can work for you, building value up over time not only through what you put into it, but also through interest that grows over time.

Instill Good Financial Habits

Building generational wealth isn’t just about leaving behind money or assets. It’s also about leaving behind information, skills, and good financial habits. Teach each generation of your family how to save instead of spend. Build from a budget. Work with your children and grandchildren to learn about investing. These are traits that last a lifetime.

Consider Life Insurance

Life insurance is one of the most affordable ways to provide your family with a significant financial cushion after your death (which is why so many people are using life insurance to build generational wealth). You pay a premium every month, and your life insurance company provides a cash payout to your family if you die while the policy is active. Life insurance comes in several forms, depending on your budget and goals. If you’re looking to give your family extra protection while you’re raising children or paying off a home, a term life plan provides affordable protection for a set period of time. If you’re looking for a guaranteed payout for your family, permanent life insurance lasts your entire lifetime as long as you keep up with the premiums. An agent can help you weigh your options and choose a coverage amount that will protect and provide for the next generation.

What type of life insurance is best to build generational wealth

There are many reasons to consider purchasing a life insurance policy. Maybe you want to make sure that your spouse or children are financially protected in the event of your death, or maybe you simply want to make sure your family doesn’t have to think about your end-of-life expenses while they’re grieving. You may even purchase a life insurance policy to build generational wealth!

You see, there are several different types of life insurance products out there, and each one serves a purpose. So, what type of life insurance should you get if you’re using the life insurance policy to build wealth?

The best option is likely a whole life insurance policy. If you decide to use term life insurance, and you don’t die during the term of the policy, the policy will do nothing in terms of the transfer of generational wealth. That is unless you have a return-of-premium rider, in which case, you’ll at least get your premiums back and be able to add the funds to your estate.

Using whole life insurance to build wealth is far more effective. That’s for a couple of reasons. First, whole life insurance never expires. So, as long as you pay your premiums, you can rest assured that your heirs will receive your death benefit when you die. And since whole life insurance protects your death benefit regardless of when you die, your heirs will be able to enjoy growth on your premiums in any event, which isn’t the case if you choose to go with a term life policy.

How to build wealth with life insurance

If you’ve never considered life insurance as a way to build wealth, you may be at a loss for how to do so. After all, the life insurance industry is large and offers several complex options for you to consider.  So, what are the steps to life insurance wealth building? Find them below.

Consider your life insurance needs

The first thing you’ll want to do is consider your life insurance needs. Your primary goal for this life insurance policy is to build generational wealth. But do you have any secondary or tertiary goals?

For example, what would happen if you needed long-term care at some point in your life? Would you need a long-term care insurance rider on your life insurance policy to help you cover that cost?

Moreover, how much generational wealth are you interested in building with your life insurance policy? Keep in mind that the size of the death benefit of a life insurance policy plays a significant role in the cost of that policy. However, there are options to leave a significant amount of money for your heirs through your death benefit. So, give careful consideration to how much coverage you need.

This should include considerations like:

• The current cost of maintaining the lifestyle of your dependents.
• Additional costs that those who depend on you may incur when you die. Do you mow the lawn, take part in child care, or prepare meals? These would be additional costs if you weren’t there to take care of them.
• How much coverage do you want above and beyond the coverage you’ll need to care for your dependents? This is important because this is the part that helps build generational wealth, or wealth above and beyond the coverage of necessities.

Compare your life insurance options

Now that you know what you need from a life insurance policy, it’s time to start comparing your options. Keep in mind that the best life insurance to build wealth is typically a whole life policy or a permanent life policy. So, you’ll want to compare these specific types of policies.

Then again, all whole life policies aren’t equal. Insurance companies are independent entities that are free to set their own pricing and determine their own levels of coverage. So, these are two areas in which leading companies tend to compete.

Before you purchase any insurance policy, make sure to compare at least three different policies among three different leading providers. And make sure that your comparisons are apples to apples. For example, if one policy is equipped with a long-term care rider, and another policy doesn’t have any riders, comparing the cost between the two would be an unfair comparison. The same goes for differences in coverage amounts and other factors of your life insurance policy.

If you’re not sure whether you’re performing an apples-to-apples comparison, reach out to an independent life insurance agent for help.

Purchase the life insurance policy that you believe fits your needs

Once you’ve compared your options, it’s time to choose the life insurance policy that best fits your needs. So, how do you do that? Follow these steps to narrow your choices down:

• Make a list: Start by making a list of all of the life insurance policies you’re interested in and their features. This includes the premiums, any riders, and any unique features that may come along with the policy.
• Compare features: Think about the features included with each policy and how they might fit into your overall goals. For example, have you already planned for any long-term care expenses that might arise during your retirement? If so, a life insurance policy with a long-term care rider simply wouldn’t be worth the added expense. If not, you may want to give such a rider — and the cost that comes with it — some serious consideration. As you compare features, cross any life insurance policies off of the list that you don’t believe fit in with what you need.
• Compare costs: At this point, every life insurance policy left on your list should meet your needs, both in terms of protecting your financial dependents from undue financial hardship and in terms of building generational wealth. So, all that’s left to do is to compare prices. At this point, the option that’s left on your list with the lowest monthly premium is likely the option that will give you the most figurative bang for your buck.
• Purchase the policy: Now that you know which policy will be best for your unique situation, it’s time to purchase it. Keep in mind that this process may involve several steps. You’ll typically need to answer a health questionnaire and take part in a medical exam. You may also need to produce medical records. Once the insurance company has all the data it needs, it will make an underwriting decision (a decision to approve or deny your coverage that could involve a change to your quoted rate).

Maintain your life insurance policy

You can only build life insurance wealth by maintaining your life insurance policy. After all, if you lapse on the policy payments, your coverage may come to an abrupt end. So, be sure to maintain your policy and make your premium payments consistently.

Still have questions?

At Fidelity Life, we’re here to help you find life insurance that meets your family’s long-term financial goals. Get in touch to speak with one of our agents or start your online quote today.

At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.