Insurance is a great way to preserve wealth. Let’s say you are 40 years old and you buy a life insurance policy. While there are many different types of policies, let’s say you go with a policy that will last until you are 90 years old. You buy 1 million dollars of life insurance which means at death your family will received 1 million dollars.
At 40 years old, the premium might be 1500 per year so after 50 years you will have paid 75,000 dollars. $75,000 to get 1 million. That would seem like a pretty good deal. $925,000 of benefit over 50 years is about a 46% rate of return every year. The only requirement is you have to pay the $1,500. If you should happen to die earlier than 90 then that money goes to the family faster. Any money going to the family is completely tax free.
Insurance can also be used to grow wealth. Some policies are designed to pay money on the premiums so that the cash in the policy increases and becomes available to you when you want to retire without taxation.
In the tax world if you own a certain amount of wealth you will be taxed on it when you die. In these cases, many people will buy life insurance in order to pay the tax and keep the rest of the wealth for the benefit of the family. In the above example, if the tax was $925,000, then that tax was paid with money costing you only $75,000. The rest of your money and assets go to the people you love and not to the government.
