“If you want to start an argument, ask a group of financial advisors what they think about buying life insurance for children.”
– Bankrate.com
Although it may seem contradictory, there are a number of reasons you may want to have whole life insurance for kids—that is, if you decided you want it, and have done your due diligence.
Structured properly, it may be to your advantage to insure your children, or even grandchildren. There’s a misconception that insurance is only for those who have a family to support. Some even wonder—does it make sense to insure an heir?
We’ll list the benefits, and you can decide for yourself. Afterall, insuring your children is by no means necessary, but we think you’ll appreciate why it’s highly desired by many.
Five Reasons in Favor of Whole Life Insurance for Kids
1. Maximized growth on savings in a tax-advantaged account.
It’s no secret—the younger you are, the lower the cost of insurance. This is often a compelling reason, as an adult, to purchase a policy sooner rather than later. And it also applies to children.
The lower the cost of insurance, the more quickly the cash value will grow. With paid-up additions maximized, the internal rate of return on a younger person’s policy is around 5%. That’s better than most CD rates!
For people over 60, the ability to store cash safely and at a respectable rate is especially attractive. The cash value is protected against volatility, and can even help you avoid an annual tax bill on growth (unlike stocks and bonds).
Whole life insurance isn’t death insurance; it’s structured to provide benefits throughout the policy owner’s whole life. Get it?
2. Virtually Unparalleled Estate Planning Benefits
If your intention is to transfer some or all of your wealth to heirs, having whole life insurance for your kids is one of the best strategies.
By utilizing a “transfer of the policy to the insured,” you can pass nearly unlimited amounts of wealth to the next generation. This transfer is income-and-gift-tax free, though may be subject to estate taxes if part of an estate.
Even better, there’s no need for a probate, trust, or even a will with life insurance! (We still recommend having a will, and ideally a trust, in place.)
This is a simple and useful way to pass along your wealth to the insured—all you must do is declare the insured an owner, and your cash value and death benefit become theirs. Now you and your children or grandchildren can benefit from the policy.
3. Flexible and Liquid Savings
Cash value, and policy loans, can be used in endless ways for the benefit of both the policy owner and the insured.
Typical financial advice is often to save in ways that divides up your wealth. The recommended accounts are also difficult to access, or are outside of your control completely. Instead, your money becomes subject to the rules of your employer, the government, or some other entity.
Owners of whole life insurance policies have the right to access and/or collateralize their cash value without jumping through hoops—even when the owner is not also the insured.
4. Covers Devastating Loss
This is one of the most common, and commonly understood, functions of whole life insurance. Though it’s hard to talk about losing the ones we love, it’s an inevitable part of life.
And while whole life insurance for kids is inexpensive, funerals, memorial services, and other final expenses are not. Grief only makes those costs more burdensome. Having a policy in place can ease those costs, allowing families time to grieve without additional stress.
And not only are those costs covered, but so is the income of the policy owner. Life insurance traditionally covers “human life value,” or lifetime earning value of the insured. And since this covers the insured, which in this scenario is a child, there are some who would write this off as unnecessary—after all, children aren’t earning an income.
Yet it can also be viewed as protection of the policy owner’s income, allowing them the time to grieve without having to return straight to work. Additionally, some parents have been able to use some of the benefits to fund charitable works done in the child’s name.
5. Guaranteed Future Insurability
Guaranteed insurability is a lifelong benefit for the insured, whether they are one or twenty-one. This allows them to be able to purchase additional insurance later in life, even in a circumstance that would otherwise make them uninsurable.
It’s important to make sure that your policy is structured to support your child or grandchild’s future insurability.
Using Whole Life Insurance to Create Good Money Habits
The above benefits are the most compelling reasons to insure your child, and can be coupled with solid financial education to instill good money habits in your children.
While children aren’t responsible for paying premiums, starting small now can help them with be more responsible in the future. By giving a small allowance, you can teach your children to save their money and prioritize between needs and wants. You can even encourage them to pursue entrepreneurship—sell lemonade, mow lawns, and more.
By exposing your children to money management in age appropriate ways early on, they’ll be better prepared for the future. And by the time they’re ready to fund a larger purchase, they’ll be much better equipped to do so responsibly.
Funding the “Big Stuff”
Using policy loans, you can fund college, pay for a car, start a small business, travel for volunteer work, or even fund a “passion purchase.” The sky is truly the limit, and by talking about money early on, you can be confident they’ll make smart choices.
When it comes to college, parents are typically advised to have a 529 savings plan, but these often backfire because they’re correlated to the market and can experience significant losses. Furthermore, any money within such an account must be declared when applying for financial aid (and thus lowers what you child may receive).
Taking a policy loan has the benefit of teaching your child to make payments responsibly, while continuing to grow their cash value. And often, you can lock in competitive loan rates that are more favorable than most federal loans. If they don’t go to college, your child still has countless options, unlike a 529 plan.
The Downsides to Whole Life Insurance for Kids
Overall, there are impressive benefits to insuring your children or grandchildren, but there are some rules and restrictions to be aware of. One such limitation is the amount of death benefit that can be purchased on a child. This impacts the amount of cash value you can build. Yet it’s important to remember that the child’s future insurability is guaranteed.
Additionally, high cash value insurance is often used to build a “family bank.” Yet doing so requires clear communication and cooperation. Talking about money from an early age, and teaching financial responsibility, go a long way in this instance.
Learn More About Generational Wealth
To learn more about teaching financial responsibility to your children, grab your free copy of “Perpetual Wealth: How to Build Wealth and Leave a Legacy for Generations.” Not only is there a chapter chock-full of advice for teaching money management to your kids, bet included are our best tips and strategies for:
- Building bullet-proof wealth that stands the test of time
- Structuring life insurance policies in a way that maximizes cash value and survives generations
- Developing the human capital of your family
- Wisdom from the wealthiest families: the “dos” and “don’ts”
- Leaving a legacy that lasts.
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