How to Leave a Large Tax-Free Inheritance Without Life Insurance

It is my opinion that the Roth IRA is the most effective and underutilized method of transferring wealth to future generations.   Now, I can hear all the life insurance agents screaming, “Roth is NOT preferable to life insurance!”  To my life insurance friends, in some ways I agree.  There is no other method where one could create an instant estate as quickly as life insurance.  Only life insurance can create an instant estate For instance, say you’re 45 years old, making good money and in good health. Your net worth consists of the equity in your home and $250k in retirement savings.   One day you get hit by a bus and die. Your spouse will inherit your equity in the home plus your $250k in retirement savings (assuming the house was jointly owned and he/she was beneficiary on the retirement account).   While that’s a decent amount of wealth, it isn’t generational wealth by any stretch. And, of course, at some point your spouse will be forced to pay taxes on the retirement account, thus reducing its value.  However, for pennies on the dollar you could buy a $2 million-dollar life insurance policy. But there’s a couple problems with this scenario. The most obvious, of course, is that you had to die for that sizeable estate to be created.  Maybe not a big deal if you’re in your late 80s and have major health issues but for a 45-year-old with kids, you probably want to avoid that.  The second issue is that you have to pay for the life insurance premiums until you die and who knows when that will be?  So, your premium payments could continue for many, many years to come.  The vast majority of life insurance policies never actually pay out. Most people stop paying the premiums well before they die. But what if you commit to paying premiums in order to have a policy pay out at your death? Well, you still have to get underwritten for the policy.  The older you are the more difficult to get approved and the more expensive the insurance will be.   When you’re young and in good health life insurance is easy to get and cheap too. But while a policy on a 45-year-old woman who is in good health will not be very expensive, is multi-generational wealth creation something that is of foremost importance to her if she is a divorced, working mother with children to raise, college costs to consider and her own retirement to save for? I highly suspect not. So, while I do love life insurance and believe everyone should get a term policy when they’re young it is not superior to a Roth for multi-generational wealth planning.  Imagine if the Roth IRA existed in 1972. You were in sales, going door to door selling encyclopedias.  Your efforts paid off when you stumbled onto a neighborhood with a large number of buyers who really liked the idea of having all that information at their fingertips. You had a great year in 1972. Your best ever, in fact.  So, you decided to invest $5,000 of your after-tax commissions into this account called a Roth IRA.  Unfortunately, in the first two years after you made the investment, the markets fell 14% in 1973 and 26% in 1974. Your $5,000 fell to $3,186 by the start of 1975. You had discipline, though, and just let it sit there. “Easy come, easy go,” you said to yourself. Then the magic of compounding interest began to work. Even with the massive crash of 1973 and 1974 you averaged 10% a year over the next three decades. Since this account was a Roth IRA there were never any Required Minimum Distributions. And you never touched the money.  Just let it grow.  Unfortunately, in 2006 you got hit by a bus and went to you