Updated: Apr 23, 2020
Hopefully, most of us are very interested in anything that can contribute to setting up a strong financial future for our kids. A wise man once told me that one of the best gifts a parent could give their child is a Whole Life insurance policy. Yeah, at first, I was skeptical, but I did some digging anyway and was pleasantly surprised by what I found. See, when we normally think of life insurance our natural inclinations direct us to only think of the death benefit, but it turns out there are significant living benefits; ones that are not offered by any other financial product in existence today. It is important before entering into this sort of contract that it is well structured, and that you are well understood in it’s inner workings, so choose an experienced financial advisor to work with. When you purchase a whole life policy you are essentially becoming an owner in the insurance company you hold the policy with. That means you share in the good and bad. If we happen to find ourselves in a “down-market” the investments are protected by a priceless attribute that kid’s have the most of: time. Children have many years to build up the value of their account, and down-markets as history teaches us, do not last forever. Here are three examples of the living benefits attached to a whole life policy for children and why it truly is the gift that keeps on giving.
Guaranteed Insurability. Even if the child is born healthy with 10 fingers, 10 toes, and everything seemingly in the right places, there will never be a guarantee that they will be healthy forever. If in future they wish to purchase life insurance, they may be ineligible based on pre-existing medical conditions, age, or other factors. When you purchase a whole life policy it is permanent, and the insurance company can not break the contract unless you do not pay your premiums, or you surrender your policy. For a few dollars more you can also purchase the ability to guarantee the child will be able to purchase more insurance at specific intervals throughout the child’s life. Because of the incredible tax, retirement, and planning benefits attached to these policies that extra few dollars now can provide significant opportunity to your child or grandchild later in life.
Cash Value. One of the major concerns for parents is putting aside money for education costs. My intention here is not to suggest that you shouldn’t be using some of the other great investment vehicles for children’s education such as an RESP. RESP’s are great and depending on the amount of money you want to stash away for education can be a great compliment to a whole life policy. What happens if your child decides on a different path in life such as starting a business and chooses not to go to university or college? Well your RESP investment will be guaranteed but the incentives you receive from the government (its main benefit) for investing in this type of account is essentially wasted. Cash values can be used for anything including purchasing a home in the future. Depending on the investment strategy of the insurance company, these policies can see great annual returns. Cash value can be withdrawn directly from the account or collateralized and borrowed against in the form of cash surrender value loans. The loan route is beneficial because it allows the account to grow as if no money was withdrawn even though the policy owner was able to take out and use the cash. Often times, loans do not need to be repaid and the lender can receive their money back by withdrawing it from the death benefit when the life insured passes away. There still isn’t any such thing as free money, but this may be as close as it gets.
Tax Savings and Planning. Because the money used to purchase the policy was previously taxable income and was taxed once already, the funds earned and withdrawn from these accounts are considered non-taxable. The owner of the policy is also allowed (within limits) to contribute additionally to the account and essentially tax shelter their funds yet again. Keep in mind that the cash values of this account can grow quite fast and over many years will likely 10X – 100X the original amount used to fund the policy. Again, not being taxed on these earnings makes it more attractive than the majority of available investments in the marketplace.
BONUS TIP 1: Whole life policies come with the option of either paying over a lifetime or paying over 20 years and owning the policy outright. If it is affordable for you and because of the effects of compounding it is beneficial to choose a 20 pay and own the policy outright after 20 years where no further payments are due.
Friends, I cannot stress enough the importance of choosing the right insurance carrier, so make sure your advisor is capable of explaining the investment strategies of the carrier they are recommending, the options to purchase more insurance in future, re-iterate the tax benefits, and explain how you can withdraw the cash value safely and securely while leaving the insurance in place. If you’ve been properly advised on this product, your only question should be, is this too good to be true?