If you have ever struggled with financial hardship, then it is likely that you do not want your children to suffer the same fate.
While there are a handful of wealthy people who have generated their money themselves, the majority of people who are wealthy today are rich because they were born into money.
Being born into money is something that is often only associated with aristocrats and royalty, but generational wealth isn’t just for the extremely wealthy.
In fact, if you make smart and steady financial decisions throughout your lifetime, you could create generational wealth for your children and their children’s children.
Creating this wealth is more difficult for those of us who aren’t born into the 1%, but it is still doable, and a realistic financial goal to achieve. But, how can you strategize for your family’s security and create generational wealth?
In this guide, we’ll take a look at how to secure your family’s future using some generational wealth tools, so to find out more, keep on reading.
What Is Generational Wealth?
First things first, let’s take a look at what generational wealth is. As the name suggests, generational wealth is wealth that is passed down from one generation to the next.
The wealth will usually be created by the first generation which is then passed down to their children. With good financial planning and management, this wealth can then be passed onto their children’s offspring, and so on.
Generational wealth is not a new concept. This concept has been around for centuries, and there are many high-profile examples of this all across the world. For example, the British Royal family is an outstanding example of generational wealth as the wealth of this family has been passed down through generations for an unbelievably long time.
Likewise, a high-profile example of generational wealth in the USA is the Mars family. The confectionary company, Mars, was first founded in 1911 by Frank Mars. More than 100 years later, the wealth of the Mars family has been passed down to his grandchildren.
They are both individually worth an estimated $24.7 billion, and the company is now being run by their children. An excellent example of generational wealth.
But, these are extreme examples of generational wealth. In reality, anybody can achieve generational wealth by making the correct financial decisions.
Generational wealth includes all your financial assets, such as investments, property, cash, and pretty much anything with financial value. So, if you can generate this during your lifetime, you can then pass this down to your offspring.
But, how do you build generational wealth? Let’s find out.
How To Build Generational Wealth
There are lots of ways to build generational wealth, but it will always begin with planning. Planning ultimately begins with those in your family, so have the conversation about how you want to create generational wealth and be open.
Unless you are open and honest with your loved ones about your financial goals, it will be difficult to achieve them.
Then it is best to look at your own finances. If you are currently supporting a family, then there is only a certain portion of your current wealth that you can put into generating more.
So, speak to an accountant to take a look at the money that you need to live, and what level of your income is disposable. It is your disposable income that you will be able to use to generate more wealth.
Additionally, it is worth discussing taxes with an accountant as poor planning could cause a lot of your generational wealth to be drained by taxes after your death.
Having a will and estate plan for this is imperative as you want to ensure that any family money is retained in its’ entirety for as long as possible.
Investment is ever-changing, and that is why it is always best to speak with an advisor to assess the best route for you. By speaking to an investment advisor, you will be able to decide whether to go down a safe or risky route of investment.
When it comes to generational wealth, safe investments are usually best. Cryptocurrency and stocks and shares might be exciting, but property and insurance are much safer.
Still many kinds of investments have their risks, so you will want to make sure to do your due diligence to ensure you a properly allocating your funds.
For example, investing in real estate appears to be a solid and safe investment, but if something happens to the breadwinner of the household, or financial circumstances change due to a severe disability, a mortgage loan could be put a risk of foreclosure. Even intergenerational wealth transfers are subject to inheritance taxes.
When you are generating wealth for your loved ones, contingency planning is key. Creating a net of financial security for your family will include weighing your investment options carefully, for the risk and reward it can provide.
Securing your money and wealth through multiple channels of investment such as carving out a proper estate plan, establishing custodial accounts for the minors in your household, designating beneficiaries, and procuring a life insurance policy can help your family retain a proper inheritance.
Although the topic of death can be an uncomfortable conversation, a good insurance policy can generate a very stable plan for financial security. Procuring a life insurance policy can go a long way in ensuring that your family is in a good financial position if anything were to happen.
But, what life insurance is best for you? Let’s take a look at some of the options.
Whole Life Insurance
One of the most common types of life insurance that exists is whole life insurance. As the name suggests, whole life insurance is insurance that is guaranteed to remain in force throughout your entire lifetime.
It is sometimes referred to as ordinary or straight life insurance, and as long as you continue to pay your premiums, this insurance policy will cover you throughout your lifetime.
Unlike many other types of life insurance, whole life insurance is permanent. In other words, a whole life insurance policy does not expire. Instead, this policy will simply carry on running (as long as you pay your premiums for the set amount of time) until you pass away. Upon your death, the agreed amount will then be paid to your family.
The death benefit can be used by the beneficiary in any way they see fit: to pay a mortgage, outstanding bills, as an emergency fund, or to just provide money over time. You should make sure that the beneficiary and you have conversations about money and proper financial literacy.
The beneficiary will receive the death benefit tax-free and the benefit is not subject to probate.
Whole life insurance tends to have the highest premiums and also the highest returns. In a whole life insurance policy there is also a cash value component that accrues and earns interest, and also inherently provides value to the policy owner. In fact, you can even borrow against the cash value and usually never have to pay the (tax-free) loan back.
Whole life insurance is an investment choice that is definitely worth it, simply because the pay-out is greater, and it is guaranteed for your lifetime. So, as long as you arrange a whole life insurance policy, and pay your premiums on time, your family will always be supported.
Term Life Insurance
Another incredibly common type of life insurance that exists is term life insurance. While whole life insurance is common in wealthy families, term life insurance is much more common in moderate to low-income American communities.
Hispanic families and black communities can also benefit from learning about insurance as a tool for providing financial stability in the future of their households.
Term life insurance is a lot more affordable for those who cannot afford high premiums. But what is term life insurance?
Well, as the name suggests, term life insurance is life insurance that covers you for a set term. A term is a limited number of years, and the exact amount will be decided when you take out the policy.
Typically, term life insurance will be taken out for either 10, 20, or 30 years. The cost of the premium will increase as the term increases. So if you take a policy out for just 10 years, the policy would be slightly more economical than a policy for 30 years of coverage.
If you were to pass away during the term of your life insurance, then your family will receive the agreed amount upon your death. But, if you survive the term of your life insurance, then you will have to take out another policy to protect your family.
This means that with term life insurance, you can often end up paying lots of money for a policy that you will not use. However, it is more affordable, and that is why this type of life insurance is so popular.
A great alternative to term life insurance is the return of premium life insurance (discussed below)
Return Of Premium Life Insurance
Alternatively, you might choose to take out a Return of Premium life insurance policy. Return of premium life insurance is similar to term life insurance because it has a set term.
But, it differs from both whole life and term insurance as the return of premium life insurance returns the premium of the insurance in most circumstances.
Return of premium life insurance is a great choice if you would like coverage for a set period of time and at the end of the policy, all the money you have paid into that policy.
That is because the return of premium life insurance will return the premiums that you spent on the insurance if you survive the term of your insurance.
So, you will get back all the money you paid in premiums if you survive your life insurance policy and had coverage during all those years.
Due to the fact that you will often survive your insurance policy, and receive your money back. It may sound too good to be true, but the catch is the premiums are much higher than a standard policy.
This means that your monthly premiums will be higher, but if you survive the term, then the costs of your life insurance would be zero when the premiums are returned to you. So, it is easy to see why this is a popular choice.
Indexed Universal Life Insurance Policy (IUL)
A lesser-known option of life insurance that people choose is Indexed Universal Life (IUL) insurance. This type of life insurance carries more risk and reward than other types of insurance.
Opting for an IUL insurance policy provides permanent coverage, with the potential for a cash value accrual during the lifetime of the policyholder.
The upside potential of an IUL policy is that the cash value portion of the policy can also earn interest based on the stock market’s performance. The IUL permanent life insurance policy provides a guaranteed minimum interest rate on the cash value component.
Therefore, if the stock market’s index, such as the S&P 500 (Standard & Poor’s) fluctuates, the amount credited to the policy’s cash value component can also increase. If the stock market yields a negative return, an IUL policy carries downside protection that is guaranteed not to lose money.
An IUL can not only provide beneficiaries with a death benefit amount but also a cash value accumulation.
IUL insurance carriers are somewhat more risk than the other insurance policies that we have looked at so far. You can get an IUL with a guaranteed no lapse (meaning that the risk is essentially zero or no risk of loss).
With IUL, there is a set death benefit which is paid out to your beneficiaries upon your death. But, the value of your policy can also increase depending on the value of the stock market index.
So, while other insurance policies will have a set amount that your beneficiaries will receive upon your death, the amount that your beneficiaries will receive in an IUL policy could potentially have a greater cash component beyond the specified death benefit.
Annuities are not the same as life insurance, but they can be used in a similar fashion.
An annuity is a long-term investment that is usually arranged to secure retirement income. If social security income is not enough, having an annuity can supplement that income (monthly payment).
Generally, you can arrange to have an annuity by paying in fixed or lump-sum payment for a period of ten to 30 years, which is then redistributed back to the annuity holder during their retirement.
The annuity is designed to help people build an income for their retirement (tax-free), secure their savings, and prepare the funds for a beneficiary other than the annuity holder.
Annuities are a great financial instrument for building wealth and securing your finances for the long haul. The contract is designed to provide a tax-free savings account where the growth of the annuity will not be subject to taxes until it is redistributed during the period of retirement.
The types of annuity come as follows:
Fixed Annuities: The rate of return for this type of annuity comes at a fixed interest rate, and is tax-free during the growth of the annuity. Providing guaranteed income in retirement.
Variable Annuities: This type of annuity offers returns based on variable financial instruments such as bonds, stocks, and mutual investments. If these instruments perform poorly, that variable annuity will subsequently perform poorly as well.
Immediate Income Annuities: This form of annuity collects a lump sum payment also known as a Single Payment Immediate Annuity (SPIA), that can be purchased with a 401K retirement savings account, or other Individual Retirement Account (IRA). This is ideal for having your payments spread out evenly throughout the course of your retirement and so on.
Deferred Income Annuities: Opting for a deferred income annuity allows you to purchase a retirement plan in one lump sum or multiple payments, to guarantee that you will receive a retirement check on a consistent basis in the future.
Annuities are reliable, and they can be a great source of income for retirement. That is because annuities can ensure that you do not outlive your money and assets.
Certificate Of Deposit
Another type of investment route, similar to annuities, which you might have heard about is a certificate of deposit (CD). Certificates of deposit are very common, and they are offered by most banks and financial institutions.
CDs have a set term, and usually a fixed interest rate. Once the term runs out, you can take the money you paid for your CD out of the bank.
In terms of generational wealth, certificates of deposit are not an outstanding method of growing your income drastically. But, they are good if you want to secure money incrementally. As we said earlier, the key to generational wealth is having multiple revenue streams.
So, if you have the money, purchasing a CD might be a great way to add another revenue stream to your family’s income.
Finally, you can use financial planning as a generational wealth tool. Financial planning allows you to look at your current financial situation, then use that to predict the future value of assets and income.
Your method of financial planning can take into account all of the options above. Using two of the financial instruments mentioned above can help secure your finances during your retirement and the future of your family.
In terms of planning and preparing for generational wealth, financial planning is incredibly important.
That is because it allows you to see where you might need to invest money, and what areas of your finances you need to improve in order to generate the wealth that you want for your offspring. So, as part of a wider machine, financial planning is an essential tool for creating generational wealth.