Benefits of Life Insurance for Kids

 

Once they reach adulthood, they’ll have access to their policy’s cash value. They could buy their first car. They could help fund college. They could put a down payment on a house.

 

Are you thinking about buying a life insurance policy on a child or grandchild, but aren’t exactly sure what the benefits of this purchase are? Fundamentally life insurance is a transfer of risk, and in most cases it’s a transfer of risk from the insured to the insurance company for the case of premature death. But let’s face it – when it comes to a healthy child, the risk of premature death is pretty low. That’s why we think the more important thing to look at is locking in their insurability.

The most important reason that we recommend that parents or grandparents purchase insurance for their child or grandchild is to lock in their future insurability. So in other words, when you purchase life insurance on a child, you’re able to “lock in their current health”.  That is so important because if  later in life, they lose their insurability because of a mental or nervous problem, a health issue or an occupational issue, they’re going to be guaranteed by the insurance company, through the policy rider, that they will be able to purchase a stipulated face amount $25,000 up to $125,000, every few years from the ages of 25 through 40. This allows them – as they become adults and maybe have become uninsurable – to take care of the things that are most important to them, their families and their businesses.

So adding that Guaranteed Insurability Rider for just a few dollars a year onto the policy for the child is going to lock in their ability to purchase more insurance throughout their adult life, which is really important.

The next point to consider when thinking about insuring a child is the cost of the premiums. Now the premiums cost much less for a child than it does for an adult because the insurance company has many more years to collect those premiums.

We often hear from people to gee. I wish I purchased insurance when I was younger. What better time to purchase the insurance than when you’re a child? Now, obviously a child doesn’t have that ability, but the parents do. My parents purchased small policies for me that would have the funeral covered in case I died. Well, I use those policies today. I borrow against those policies to purchase my computers and every couple years I pay the money back and then it’s time to buy a new computer.

Well, the other practical purpose of having insurance we talked about earlier was guaranteed my youngest son when he was 18, had a stroke he’s uninsurable, but he has a large policy with options that he can purchase additional insurance in the future. So he can take care of his family and his business.

This brings us to our next point – the savings component of the policy you see with every whole life insurance policy. The insurance company is making two promises. The first is to pay a death benefit whenever the insured dies. The second is that the cash value in the policy will be equal to the face amount at the age of maturity – so the cash value is guaranteed to be there. Because of that aspect of a whole life insurance policy, you’re actually getting multiple duty dollars. Think about it instead of just putting money away in a savings account or a mutual fund or a 529 plan, you’re also getting a death benefit. You’re also getting future insurability and you’re also giving them the ability to choose how they want to use their money. It’s almost like their money is going to be in two places at once. They’ll always have access to cash in the policy and they can use it for whatever they want. And the money’s going to continue to grow uninterrupted on a tax-favored basis.

With the loan provision, they’ll have guaranteed access whenever you’re ready to transfer the policy into the child’s name. Once they reach adulthood, they’ll have access to their policy’s cash value. They could buy their first car. They could help fund college. They could put a down payment on a house. The possibilities are limitless. There’s no stipulations that say what policy loans can be used for. The only stipulation is that it’s guaranteed, that they’ll have access to the cash value via the policy loan, which is a really great thing for a savings vehicle for a child or a grandchild.

So now that we looked at the benefits of owning life insurance on a child or a grandchild, we have to also discuss the rules because insurance companies have special underwriting rules that they abide by when considering offering insurance to a child.

The first rule is that the child can’t have more insurance in place than the parent, unless there’s a good reason such as the parent is uninsurable.

The second rule is that when the child has siblings, then all of the siblings need to be equally insured. In the case of a grandparent purchasing on a grandchild, all of the grandchildren would also need to have equal amounts of life insurance in force.

In conclusion, life insurance is a unique financial tool for children or grandchildren. It could literally protect them from the cradle to the grave. They’ll have access to cash everywhere along the line. They can use the money to supplement their retirement income on a tax favored basis. And then they pass away and the money goes to their children or their grandchildren. It is a unique financial tool that should be considered. It may not be everybody’s choice, but it definitely should be considered and in the conversation.

If you’d like to get started with a policy on your child or grandchild, or would like to learn more about the options, feel free to give us a call, or to schedule your free strategy session today. Please leave us a comment down below, let us know what questions you have about life insurance. And we’ll be sure to answer them in upcoming videos.

Remember, it’s not how much money you make – it’s how much money you keep that really matters.

Qualified Plans: The Hidden Truth

These are not tax savings plans but
rather tax deferred savings plans. The government did not say that you don’t have to pay taxes…

 

For many people, the term 401k is synonymous with retirement preparation, and sometimes represents the full extent of
their preparedness. Such accounts are often included as part of a benefits package provided by employers, and chances
are if you have one, most of your retirement savings are being deposited into this account. Given that it can play such a
prominent role in our financial picture, it is imperative that you fully understand exactly how these plans work.

So what do Qualified Plans do exactly?

Most people will be familiar with the fact that they defer taxes, which is true. But this term “defer” can often lead to a
misunderstanding about what is actually happening. Some people fall victim to the misconception that “deferred” taxes are
taxes they are “saving” because the taxes do not have to be paid; which is not true. These are not tax savings plans but
rather tax deferred savings plans. The government did not say that you don’t have to pay taxes on the dollars in your
Qualified Plan; they said that you don’t have to pay the taxes now.

If not now, then when?

Well, later obviously. The key difference between now and later though is relative to your tax
bracket. What bracket you are in now, and what bracket you will be in when you decide to take the money out of the
account. If you defer the tax and you are in a higher bracket later than you are in today your share of the account will be
less. If you are in a lower bracket when you take the money than when you put it in you will get more. The IRS is not
going to ask you what tax bracket you were in the day you made the contribution to your account. Their only concern is
going to be what tax bracket are you in at the time of withdrawal. Because this is true you will need to make an informed
decision about which option is best for you.

The Check Story

“Let’s assume that you call me one day and want to borrow $10,000. I hand you the check, but before you take it you are
going to ask me two questions. The first is how much interest am I going to charge you, and the second is when do you
have to pay it back?

Suppose I said to you, I am doing fine right now and do not need the money, but there will come a day when I need it, and
when I know how much I need we can figure out how much interest I need to charge you to get how much I need.”
Would you cash that check? Probably not, but you are standing in line to do exactly that with the federal government in
your qualified plan. They did not say that you don’t owe the tax; they said you can pay us later. At what rate? Now that is
a good question.

Understand that Qualified Plans do two things:

1. They defer the tax, AND
2. They defer the tax calculation

Ultimately, the impact these plans can have on your finances either positively or negatively, depends on a number of
factors. The first and most fundamental of these is your understanding of the rules of the game, and secondarily the
strategy you use to play the game.

Tic-Tac-Toe

You may not remember the first time you played tic-tac-toe, but you can probably guess who won. It was likely the person
who showed you how to play the game. The game has only a few simple rules, one is the X, the other O, three in a row
wins. As we first learned this game as children, we lost routinely until we learned the strategy of the game. If you have
dollars in a Qualified Plan, you are already playing the game. As an advisor, my job is is helping clients employ a winning
strategy by better understanding the rules of the game.

Becoming the beneficiary of your own life insurance policy: How to use the living benefits

 

“You see, instead of becoming a victim of market volatility, owning cash value life insurance allows you to access that money so that you could actually profit from market volatility.”

 

There are two main types of life insurance. The first is term insurance, which has one benefit and one benefit only, the death benefit. Then there’s cash value life insurance, which has a death benefit, but also has several other living benefits. By taking advantage of these living benefits, we’re able to overcome the five financial challenges that we all face. 

It has often been said that there are two certainties in life, death and taxes. So let me ask you a few questions. Number one, do you think taxes are going to be higher in the future? Number two, do you think that with all that’s going on in our country, and keep in mind that we’re nearly $28 trillion in debt, do you think there’s a potential for taxes to go up much higher in the future? Now here’s the most important question. Do you want to pay those taxes? You see, after you pay tax on your earned income, the choice of whether or not you pay taxes in the future on that money is completely voluntary. 

Which choice have you been making? And with that in mind, wouldn’t it make sense to build a pile of money that the government could never access ever again, as long as you live? You see, the living benefits of life insurance allow you to have that money grow on a tax deferred basis, and you could access it on a tax-favored basis via the loan provision. Finally, that money passes to a named beneficiary on an income tax free basis. Do you know of any other financial tool, financial product that could be that tax efficient and provide liquidity use and control of your money? 

The next challenge we all face is lower benefits in the future, you know, higher premiums, higher deductibles, and more out of pocket expenses. But, doesn’t that mean a lower standard of living for you and your family? Are you okay with that? Because I’m not. If there was a way to replace those expenses, when would you want to know about it? Before or after the benefits are lost? By using the living benefits of life insurance, you’ll have access to money to supplement your income when those benefits are lost, and still have death benefit to pass onto your family. 

If there’s going to be higher taxes and lower benefits, will that be enough to fix all the problems that are about to happen in our country? So how will our government respond? Won’t they print more money? When they print more money, doesn’t that cause inflation? You see, inflation is the third financial challenge that we all face. So what’s your strategy to overcome the effects of inflation? More importantly, when you’re retired, how are you going to overcome inflation? The living benefits of a life insurance policy provides multiple duty dollars. What that means is, the money can be accessed to overcome a long-term care event, a chronic illness event. We know that it can be utilized to supplement your income for anything. Finally, it can do all of the above on a tax-favored basis. 

That’s multiple duty dollars, and that’s how the living benefits of cash value life insurance can help you overcome the effects of inflation. So if there’s higher taxes, lower benefits, and the government prints more money, won’t that cause more and more volatility in the markets? Higher volatility in the markets is the fourth financial challenge that we’re all going to face. If there’s higher volatility in the markets and you make a mistake, can you lose some money? If there’s higher volatility in the markets and you make four or five mistakes, can you lose it all? 

Wouldn’t you benefit from a strategy that allows you to lock in your money when the markets are high so that when the markets go down, you’re in a position to access that money because your money wasn’t correlated to the market and you can profit from all the mistakes, errors, and blunders that are made in the market. You see, instead of becoming a victim of market volatility, owning cash value life insurance allows you to access that money so that you could actually profit from market volatility. 

The next challenge we all face is the challenge of outliving our income. If we retire at age 65 and only live till age 72, would we have much trouble planning for that retirement? But what if we retire at 65 and live all the way till 95, but run out of money at age 72, what would the rest of our retirement look like? And by the way, isn’t 72 the new 52? Aren’t 72 year olds doing what 52 year olds used to do? Do you have a strategy in place that could provide you with an income that you can outlive? By taking advantage of the living benefits of life insurance, you could provide supplemental income when all your other streams have dried up. 

Do you realize that most people view these five issues, higher taxes, lower benefits, higher inflation, greater volatility in the market and longevity, outliving money, as challenges. Here’s what owning cash value life insurance can do for you. What if you never had to worry about these issues ever again for the rest of your life? What if any time any of these issues occurred, you’d be in a perfect position to take advantage of it. Wouldn’t that be a great benefit to have? 

Do you know of any other financial products that can provide these benefits with certainty? Can a CD savings account, money market, IRA, stocks, or bonds provide you with these benefits? You see, the living benefits of life insurance can help us overcome these five challenges, and in essence become the beneficiary of our own life insurance policy. But then we still have the death benefit that goes to our family. So if I can show you how to be in complete control of your money until you take your last breath, but instead of leaving that money to a nursing home hospital or the government, you can leave that money to your family for generations to come. Wouldn’t you want to know about it?