Sunday, June 19, 2011

Paying it forward

If I died today my daughter would be a millionaire! Not because I have amassed this giant empire, but simply because I have purchased that much life insurance. We cannot continue to allow our children, nieces and nephews, and grandchildren to start out with nothing. The American economy is no longer the behemoth vehicle that can provide unlimited opportunities to anyone who gets a good education and is willing to work hard. Now, more than ever, we must learn to pass on wealth.

There are two ways even those with modest incomes can pass on wealth to the next generation: real estate and life insurance. Buying a house may still be the best way to build wealth in America in the long term. If we have, indeed, paid off the mortgage in thirty years (or by the time we die, whichever comes first) the next generation will inherit a valuable asset. No matter where you live, real estate is an asset that your children can utilize to get started in life. They will then have a down payment on their own home or the seed money to start a business or to start investing. Real estate that is encumbered is not as attractive an inheritance so it is necessary to have enough life insurance to pay off the mortgage in the event of your death if your home is not paid off. So, besides having the obvious life insurance policy to bury yourself, you definitely need enough life insurance to pay off the mortgage.

So after purchasing these two basic policies we all need at least one permanent life insurance policy which never expires and pays us by building cash value. The cash value is an asset which you can withdraw or borrow against or use as collateral for a loan or even use for your own retirement while not affecting the death benefit which is there to leave for the beneficiaries to pass on wealth. The beauty of life insurance is that it is the most cost effective way to fund an inheritance for the next generation for people of modest means since you never actually invest the amount of money that you are able to pass on.

We cannot continue to live by that old mantra of "I got mine now you get yours". The amount of money needed for a minimum 20% down payment of a median priced house today is out of the reach of most young people. And if they are also repaying college loans, which may be as much as the price of a house, home ownership, and, consequently wealth building will be almost impossible for them to attain.

The color of one's skin is less of a discriminating factor than the size of one's bank account in America today. So, whereas we cannot change the color of our skin, we can impact the size of our children's bank account by committing to passing on wealth to the next generation.