Over the next 25 years, it's estimated that U.S. households will pass more than $105 trillion in wealth to their younger family members and charities.1
If you're planning an inheritance for your family, life insurance potentially could be a way to leave more behind while also covering some of your own financial needs. Here's a look at generational wealth transfer and the role life insurance can play in your inheritance planning.
The Landscape for the Great Wealth Transfer
When preparing to leave an inheritance, many people want as much of their money as possible to go to their family. Without proper planning, however, a significant portion can be reduced by taxes and other costs.
After a loved one passes away, families often face several common expenses, including:
- Medical bills and outstanding debt
- Funeral and burial expenses
- Legal costs to process a will and distribute assets
These costs are typically paid from the deceased’s estate. Only the remaining assets are passed on as an inheritance.
Depending on your net worth, your beneficiaries may also need to cover estate and inheritance taxes, and estates valued over $15 million in 2026 may be subject to federal taxes.2 Some states, however, impose estate or inheritance taxes on estates worth as little as $1 million.
Together, these taxes and expenses can place added pressure on beneficiaries. If the inheritance includes noncash assets such as real estate, a small business, or stocks, your family may need to sell assets quickly, even if market conditions are unfavorable, to cover these costs.
Life Insurance as an Inheritance Tool
Life insurance can help you leave a more effective inheritance for your family. A life insurance policy pays a death benefit to the beneficiaries you choose, giving them cash they can use for expenses after you pass away. You can also direct part of the proceeds to a charity.
Leaving cash behind can serve a similar purpose. However, using that money to purchase life insurance may allow you to leave more than the amount you originally paid in.
As an added benefit, life insurance can help your beneficiaries by:
- Avoiding Probate: Life insurance death benefits typically do not go through probate, the legal process used to review a will and distribute assets.
- Faster Access to Cash: Probate can take months or longer. During that time, beneficiaries may need funds to cover expenses, such as bills for a home they plan to inherit.
- Provides Liquidity: Life insurance can supply potential cash value when other inherited assets are not immediately accessible.
Another advantage of life insurance in terms of a generational wealth transfer is that policies can be easy to divide among beneficiaries. They can also help address unequal inheritances. For example, if one child inherits the family business, a life insurance policy could be left to another child to help balance the distribution.
Benefits & Drawbacks to Consider
Life insurance can offer benefits while you are still living. Certain policies may help cover medical bills or long-term care expenses. Some policies also build cash value, which may grow over time and accessible during your lifetime.
Potential Benefits
Some of it's potential benefits are:
- Help pay for medical or long-term care expenses
- Potential build cash value over time, depending on policy
- Cash value may be accessed through withdrawals or loans
Accessing cash value may result in taxes and loan interest, reduce the policy value and death benefit, and potentially cause the policy to lapse if not managed carefully. Because of these risks, it is important to evaluate whether a withdrawal or loan makes sense for your individual situation.
Potential Drawbacks
Using life insurance as an inheritance strategy has potential drawbacks:
- Premium payments reduce available liquid cash
- Policies are best suited for assets you intend to leave as an inheritance
Life insurance may also supplement retirement income, but it should not be treated as a standalone retirement or savings strategy.
Another potential downside is that you may need to undergo medical underwriting to qualify for life insurance. If you have serious health issues, this strategy might not be a viable option.
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4 Life Insurance Inheritance Strategies
There are several ways to use life insurance to transfer wealth to younger generations. When deciding what works best for your situation, a few key actions can help guide your approach. Here are four strategies that can potentially help set you up for success.
1. Understand the Tax Rules for Cash Value
If your policy includes cash value, you can generally withdraw up to the amount you paid in premiums without paying taxes. Withdrawals above that amount are typically taxed as income.
Paying too much in premiums early on can cause the policy to become a Modified Endowment Contract (MEC) under IRS rules. Single-premium policies are usually MECs.
Your insurer can confirm whether a policy will be classified as a MEC when you apply. If access to cash value during your lifetime matters to you, work with your insurer to structure the policy accordingly.
2. Discuss Your Plan With Other Family Members
Life insurance decisions tied to inheritance can affect your family’s long-term finances. Family members may be interested in helping maximize the benefit. For example, they may offer to contribute toward premiums so you can secure a larger policy.
If future premium payments are a concern, you could also set expectations that family members may help cover costs later. This can help keep the policy active for inheritance purposes.
3. Set Up a Trust Fund for Younger Family Members
Leaving a large inheritance to a minor or young adult can raise concerns about how the money will be handled. In most states, beneficiaries must reach the age of majority, usually 18 or sometimes 21, to receive funds directly.
In these situations, you can set up a trust fund on their behalf. A trust can hold assets for a younger beneficiary and distribute funds based on rules you set. You can name the trust as the beneficiary of your life insurance policy and specify in the instructions when payouts occur, such as at age 25.
4. Donate Your Policy to Charity
You can support a charity by naming it as the beneficiary of your life insurance policy. This approach allows you to create a larger future gift instead of making annual donations. Beneficiary designations can usually be changed later, but doing so would eliminate any related tax benefits.
Another option is to transfer ownership of the policy to the charity. This may allow for an immediate tax deduction and potential deductions for future premium payments. Once ownership is transferred, the decision typically cannot be reversed.
Start Planning as Soon as Possible
Most life insurance coverage requires health qualification. The younger you are, the better your chances of qualifying. It's also easier to qualify before developing serious health conditions. If you have health issues, you may still qualify. It's free to apply and find out. Some policies, such as second-to-die policies, have more liberal medical standards too. The sooner you try, the more options you might have.
Final Thoughts
If you are considering different inheritance strategies, planning ahead can give you more flexibility and a stronger position as you move forward. Working with a financial professional can help you weigh your options and align them with your goals. When used thoughtfully, life insurance can play a meaningful role in helping your family navigate the wealth transfer and preserve what you have worked to build.
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Sources
- From Inheritance to Impact: A Realistic View of the Great Wealth Transfer. https://www.helenbrowngroup.com/from-inheritance-to-impact-a-realistic-view-of-the-great-wealth-transfer/.
- Estate tax. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.
