Multigenerational Legacy Planning with Whole life insurance

Life insurance gets more powerful if we can look at multiple generations. So let's take a look at this particular example of what we call multi-generational legacy planning. We're going to look at life insurance and how it can be utilized across three generations, the grandparents, the parents, and the children. In this case it's going to be generation one, which is the grandparents who are taking out a policy on valued client, which is generation two, their adult children, and ultimately it's for the benefit of generation three, the grandchildren. So you can read through the reasons you might want to do this, but again three generations involved, the grandparents who are the ones initiating this policy, there's the adult children, and then ultimately the grandchildren is who this is ultimately going to benefit. So here's how it works in this particular case, and there's a lot of different ways we could do this. This is just one example, but it's a fairly typical example. So we have generation one, which is the grandparents. They're going to purchase whole life insurance policies on their adult children. The grandparents maintain full ownership and control of the policies while they're alive. So I, as the grandfather, take out a policy on my adult son. I am the owner of that policy and potentially the beneficiary. While I'm alive I can use the cash value I have full access to and control over that policy while I'm alive. At some point in the future, typically upon the death of the grandparent, but it doesn't have to be, but at some point in the future that policy is transferred into a trust. So I'm the grandparent, I take out a policy on my adult child. When I die, that policy is still in force because the insured is not me, it's my adult child and he's still alive. So that policy would then pass typically to a trust. So the policy is still in force, all the benefits are still there and available, and it's going to go into a trust in this example. Again, there are multiple ways we can do this, but typically we're going to be using a trust to control these assets. So the trust is a contingent policy owner. So again, I as the grandparent, I'm the owner, but the trust is a contingent owner. Meaning if I die, the trust now has ownership of that policy. There are lots of different ways you can do this. Ultimately now that trust is to be used for the children of my adult children, meaning my grandchildren. So that trust, I'm going to be the one who sets up the trust as well, and the trust will dictate how that life insurance policy is to be used. And that's completely up to me. I can decide exactly how it's going to be used. And so now by setting up that trust, I can control how those assets are used even beyond the grave. That's how a trust is intended to be used. So I can ensure that the death benefit proceeds and the cash value and the other living benefits of that policy are not going to be used in any way except how I want them to be used. So they're not going to be wasted or squandered, similar to what the Rockefellers do. Meanwhile, all the cash value keeps earning on a guaranteed tax-free basis, death benefit keeps growing, et cetera. So whoever the trustees are can access the policy. The trustees obviously are going to be people that you trust, hence the name trust. Could be your adult children. It could be other people, whoever you think is in the best position to manage those. And then eventually your adult children are also going to pass away. And the trust then is the beneficiary of the policy. So now that death benefit, which is hopefully a large death benefit because it's been growing this whole time, now passes into the trust and can still be used. And what we typically do is we set up the trust such that when those death benefit proceeds are received, it's required to be used to purchase the next generation of life insurance policies. So we have this ever-expanding base of capital inside the trust in life insurance. And we can take out policy loans against those life insurance policies for various reasons, but we can never withdraw capital from it. And so we keep this ever-expanding system of life insurance policies in force. And all the people who are responsible can get access to the cash value in those policies, but only under if they meet certain requirements. And we're never withdrawing capital from those policies. Therefore, we never decrease the capital base. And this is how we set up, maintain, and perpetuate a family banking system that all the responsible family members can use in a manner according to what the trust dictates. You can't just squander the money. And this can be very powerful. And this is indeed what the Rockefellers do. And this is just one example. I did not design this policy. This is just a sample policy, and I think it's a few years old. But here what we're doing is we're taking out a policy on the adult daughter, 35 years old, and we're paying about $11,000 a year. The grandparents are paying about $11,000 a year into that policy. The initial death benefit is a little over half a million. The policy is paid up in 65 years. And so we can see how this policy grows here. And so we're just paying up the policy in 10 years, actually, right? So you can see over 10 years, we pay a little over $100,000 into the policy. And then the policy is fully paid up. Now, I probably wouldn't design the policy this way, but this is just an example. I think a lot of people like to see a short pay policy, because they don't want to pay premiums for a long period of time. But then as we educate them on how whole life insurance works, they'll understand why you should actually want to pay those premiums for as long as possible, because the premiums you pay later in the life of the policy are far more powerful than the premiums you pay early on in the policy. Nonetheless, that's how this one is structured. We can see over 10 years, we've paid $109,000 in premiums in the policy. The adult daughter and her husband used $80,000 from the policy to fund the grandchildren's college. And then $200,000 was used to supplement their retirement. And this is for the adult children, not the grandchildren. And then a $430,000 death benefit pays out when your adult children pass away that goes to the trust. We paid in about a little over $100,000 and we've got over $700,000 worth of benefits out of the policy. And this down here is the ledger showing the details. We pay in this $11,000 premium roughly for 10 years. You can see how the cash value grows. By year 10, we have over $130,000 in cash value. And we have a $712,000 death benefit. Then here, parents are going to use $20,000 a year for four years to pay for college education. And I think they're just withdrawing the money, which I would not recommend. I think they're not taking policy loans. They're simply withdrawing money from the policy, which we generally don't recommend. But it is something you can do. The reason we don't recommend it is because once you withdraw the money, you cannot put it back. And then you lose all the earnings on that policy. Whereas if you borrow against the policy, you don't interrupt the earnings. And you can then put that money back in the future when you pay back that loan. You're just paying back your own private banking system. You're not making repayments to a third-party lender. But nonetheless, that's what they do. And then we see once our adult children have reached the age of 66, presumably we as the grandparents are now dead and gone now, but they still have this policy. And they're now going to use it to supplement their retirement. So they're going to take $10,000 a year in income. Again, I think they're just doing withdrawals, not policy loans, over 20 years. So that's $200,000 in tax-free retirement income that they got out of the policy. They still have a remaining $267,000 roughly thousand dollars in cash value, $436,000 death benefit. Here you can see for what it's worth, the internal rate of return on the cash value to that point is 4.9%. So a little under 5%. Keep in mind, no taxes are paid on it. So a 5% tax-free return would be the equivalent of a 6% or 7% return if it were taxable. And then we can see the death benefit. If they were to die at age 85, then that $436,000 death benefit would be paid out to the trust. And that can then be used for legacy, for the grandchildren, for whatever the trust is set up to do, maybe to purchase the next generation of life insurance policies on the grandchildren in order to perpetuate the system. So this can be a great use case for life insurance and it can help you to grow your legacy. The more generations we include in the planning process, the more powerful life insurance becomes. Not only because life insurance ages like a fine wine, it gets better every single year, but also because of the degree of control it gives us, where none of that capital is ever going to escape our banking system. It's all going to keep earning in a tax-advantaged, guaranteed fashion, and we're just going to be borrowing against it. That control, and then also the way it allows you to perpetuate your value system through this policy, because you're going to dictate in the trust how policy loans can be used. There are certain behaviors you want to encourage and certain behaviors you want to discourage, and you can do that by providing financial incentives through the policy. Certain behaviors will be happy to give you a policy loan, and we as the private family bank will set the repayment terms and we'll make it fairly generous if you do behaviors that we want you to engage in. If you do other behaviors, we're not going to finance them at all. So this is the idea of multi-generational, sometimes called intergenerational, legacy planning, and life insurance is a great tool for achieving this. If you'd like to talk more with us about this, if you want to do something for your children, your grandchildren, your great-grandchildren, you can use the link in the comment and description below. Hopefully we'll talk soon. Bye-bye.