Money

Wealth manager: Most Americans don’t know about this one way the rich build wealth

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Rebecca Walser, a wealth management advisor who specializes in financial planning for high net worth individuals, tells CNBC Make It that the rich use plenty of tricks to build wealth, but "the most common one is something that most regular Americans don't even know a thing about: Investing in permanent life insurance policies."

Permanent life insurance policies, which Walser discusses in detail in her book, "Wealth Unbroken: Growing Wealth Uninterrupted By Market Crashes, Taxes, And Even Death," allow you to build savings in a tax-advantaged account.

Unlike term life insurance policies, which are cheaper, temporary and have pay-outs that are only accessible upon death, permanent policies offer a cash-value component.

Here's how they work: You invest a lot of money into an account, basically "over-funding" it, and watch it grow, tax-free, says Walser. And that's money you can access during your lifetime.

There are a couple different types of permanent policies, whole life and universal life. A whole life plan is a more long-term one with fixed premium payments and death benefits, whereas a universal life plan is more flexible. There's also an indexed policy, which allows you to invest in an equity index account.

But the shared benefit of each of these is the accumulation of cash value.

When it comes to withdrawals, you can take out what you've already put in, but if you want to touch the gains, you'll be taxed.

As for your beneficiary at the time of your death, his or her insurance payout is not taxable, but what happens to the cash value part of the policy can vary. Sometimes the insurer actually gets to keep it.

Not touching the money at all allows for maximum growth. By Walser's estimate, if you start putting $2,000 a year into an account when your child is born, by the time they are 60, they will have access to hundreds of thousands of tax-free dollars.

On the flip side, cash value life insurance, which can either grow at a stated rate of interest set by an insurer or be pegged to the market, will likely not beat market returns these days, considering its current height.

And because these permanent policies are significantly more expensive than term policies, they're not always a great investment for the average American family. Other tax-deferred options like IRAs, 529 accounts and 401(k)s are all available at a lower cost. In fact, many advisors actually don't recommend buying life insurance for children, unless you are doing it to replace a family breadwinner's income.

Also, for those who can afford to over-fund their cash value policy, there can be complex tax consequences. Broadly speaking, paying too much in premiums can turn the policy into a modified endowment contract (MEC). That shifts how your cash-value withdrawals are taxed and imposes a 10 percent penalty on any taxable withdrawals.

For all these reasons, these policies might not necessarily be the best option for the average American family. For most, life insurance is a protection tool, not an investment.

Overall, though, Walser thinks these accounts could be an under-the-radar strategy worth considering. "The wealthy have been creating a lot of wealth in life insurance," she says.

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This article has been updated to include additional information about cash value permanent life insurance policies.