Best Children’s Life Insurance Policy. How to Leave a Legacy with only $99.
When people think about life insurance for children, they typically think about the old child whole life policies your grandparents use to buy or maybe even the Gerber Grow Up plan. Both of which are a waste of money.
The type of life insurance policy for children we are talking about is much, much different from those old types of plans. It is a permanent plan but not a whole life insurance plan.
It’s called a Child LIRP. And I set up one for both of my kids when they were babies.
This plan serves three main purposes. It provides guaranteed insurability for life, the ability to access cash in the child’s ’20s or ’30s, and to give them a stream of tax-free income when they retire.
The best part is I only need to fund this policy for 20 year and just $99 a month.
Although nobody wants to think about the loss of a child, owning this type of life insurance coverage for a child can provide a number of financial benefits – both in the short- and long-term.
How the Old Whole Life Insurance for Children Works
Your grandparents may have set up a child whole life insurance policy for you when you were young or they may have opted for the Gerber Grow Up plan. It’s likely that, while well-intentioned, this plan offered only a small death benefit, along with cash value that grew – but at a turtle’s pace.
Unfortunately, the only one that these plans usually benefitted was the life insurance company. That’s because, with no real benefit to speak of, it was probably determined at some point that the premium wasn’t worth paying.
But a Child LIRP is much different from whole life coverage – and there are several reasons for this. One is because these plans offer a significant death benefit for the child, starting on day one. This can provide funds for parents and other loved ones if the unthinkable occurs. It can also offer guaranteed insurability throughout the child’s life – even if he or she contracts an adverse health condition in the future.
Another key benefit of a Child’s LIRP is the cash value – which can grow to an excess of a million dollars by the time the child reaches retirement age. Plus, there are strategies for accessing this cash tax-free, so it can be used for paying off high-interest debt like student loans, or a nice supplement to future retirement income.
How a LIRP for Children Works
Starting a Child LIRP (or IUL for a kid) can provide both financial security and protection throughout all phases of his or her life.
A Child LIRP is an indexed universal life, or IUL policy, the cash value can grow, based on the performance of an underlying market index such as the S&P 500. These plans can offer the chance to attain double-digit upside performance, depending on the stated “cap,” or maximum. We can set you up with the best life insurance companies as we know all the carrier’s products and benefits.
In addition to the opportunity for cash value substantial growth, with a Child LIRP, there is no need to worry about the loss in value – even if the stock market tumbles. That’s because IUL’s provide guaranteed minimum floors of 0%, which keep the principal safe.
As the cash value in the policy grows, it is able to compound on a tax-deferred basis, meaning that no tax is due on the gain. This can allow the money in the policy to grow and compound exponentially over time.
Unlike IRAs and employer-sponsored retirement plans like 401(k)s, there is no IRS “early withdrawal” penalty for accessing funds from a LIRP prior to age 59 ½. This means that money is available at any age, and it doesn’t have to be reported on a tax return.
There is also no funding limit with a LIRP as long as you do not MEC the policy. So, if the child decides to add more money to the plan over time, these funds will also have the benefit of growing tax-deferred. With that in mind, this buying life insurance coverage can offer a great alternative for tax-advantaged growth, even if an individual’s IRA and/or 401(k) have been “maxed out” for the year.
Decide On Term Or Permanent Life Insurance For a Baby
When it comes to life insurance, there are two main types: term life insurance and whole life insurance. Term provides coverage for a set period of time—usually 10 to 30 years—and pays out only if you die during that timeframe. Term life insurance is rarely a good idea for a child.
Permanent life insurance coverage provides protection throughout your entire life, but requires regular monthly premium payments which will build up cash value. When it comes to providing for children’s future education costs, permanent insurance is usually the best choice, as you can build up a lot of cash value and solve many of life’s future challenges when buying this plan.
3 Reasons I Set This Plan up for My Children
You can never be too careful when it comes to protecting your family, and buying life insurance for your child ensures that your kids are always taken care of no matter what. But with so many life insurance companies out there, how do you know which one has the best child life insurance plans? That’s where we can help. We do know.
Below I will give you reasons I set up my kid’s life insurance plan and why it will ensure that my children are financially safe after I’m gone..
Guaranteed Insurability for Life
While the main goal of a Child LIRP is to provide living benefits like retirement income and funds for other needs, one of the primary benefits is the death benefit protection the child policy includes.
With a LIRP or IUL for children, you can immediately lock in life insurance at a preferred rate (with one life insurance company). Plus, the policy includes an increasing death benefit which will leave them with plenty of coverage in the future. With this option, the child can protect his or her loved ones down the road as they become adults – even if they have contracted an adverse health condition – they will still have their insurability
Start a Business, Pay Off College, or Purchase a House
If you set up a LIRP for your child, as they become older, the cash value in the policy will continue to accumulate better than any savings account or 529 plan. And, by the time the child reaches college age or older, they will have accumulated a nice lump sum of cash within the policy.
This cash can be taken as a tax-free loan or as a withdrawal from the policy. This money will be available for a variety of needs and wants, such as paying for college or student loans, starting a business, and / or purchasing a home.
Stream of Tax Free Income in Retirement
We talked about the ability of this policy to grow cash value – but how can that cash value be used in the future?
There are actually a number of ways that cash from the Child’s LIRP can be used in the future – which is why these plans are considered too flexible. First, if the cash is held in the account until the child reaches retirement age, he or she can take tax-free policy loans to supplement retirement income. This can help to provide income certainty – regardless of what future income tax rates are.
At the same time, because a LIRP provides a “floor” to your returns, there is never a year where the cash value takes a loss. This is true, even if the stock market tumbles. Plus, because there are no losses, the cash in the LIRP continues to build on previous gains. You can’t get this type of safety – or guarantee – from market-related investments.
There are any number of ways that the cash from the policy can be used, such as:
- Starting a business (without having to take out a loan)
- Paying for health care and/or future long-term care needs
- The purchase of a home and / or vehicle
- Lending to others in return for a stated interest rate (which can essentially boost income even more
A look at the numbers
Now that you know the reasons that I set this plan up for my kids, let’s dive into the numbers so you can have a better look at what happens to the cash value and how it can be used in the future.
The policy I designed for my kids calls for monthly premiums of $99, which are paid over a 20-year period. These premiums can be paid by either a parent or a grandparent. After 20 years, there are no more premiums that have to be paid into the policy.
I’ve illustrated this plan in two ways. Option A with a one-time cash distribution to the child at age 30, and Option B where the child does not take money from the account.
In option A at the child’s age of 30, a withdrawal of the premiums – a total of $20,000 – can be taken out of the policy and given to the child to use – or even to reimburse the payor. Here is an example of tax-free income the child can take even with taking a distribution at age 30, by the time she turns 65 she could begin accessing more than $57,000 per year over the next 15 years, which essentially allows her more than $900,000 in cash distributions tax free.
In option B if she leaves the policy as is until retirement age, though, the numbers get even better! In this case, she could access more than $1.3 million – accessing more than $81,000 per year over the next 15 years – even though the total premiums contributed were less than $25,000!
- $20,000 Cash Withdrawal at age 30
- Initial Death Benefit $177,805
- Tax Fee Income – Ages 65-80 – $57,610/year
- Total Contributions $23,760
- Total Distributions $941,760
- No Cash Withdrawal at age 30
- Initial Death Benefit $177,805
- Tax Fee Income – Ages 65-80 – $81,801/year
- Total Contributions $23,760
- Total Distributions $1,308,816
How to Set Up a LIRP for Your Child
Setting up a IUL Plan for kids is easy – and can set your child up with a lifetime of security. While there is a long list of benefits to setting up a LIRP for your child, the actual mechanics of putting the plan in place can be somewhat challenging.
So, in order to make sure that the strategy works the way you intend it to, it is best to work with an insurance professional who not only has a focus on Life Insurance Retirement Plans, but who can also go out into the market place and find the best product for your specific needs.
And remember don’t waste time or money with the child whole life insurance policies that are available today or the Gerber Grow Up Plans. If either of these were great products, that is what I would have bought for my kids. They are not, let us design you a real product with real benefits.
Also, If you have a child who needs coverage, it’s best to buy a separate plan as opposed to adding them to your existing policy.
Another important point to remember is that although buying life insurance can help provide for your child if something were to happen to you, it’s also an investment that provides protection for your family even when you’re alive. Many experts recommend saving enough money in a separate account (usually known as a helper account) to pay off debts and provide some financial support for your loved ones after you pass away.
At Insurance Geek, we work with more than 30 of the top-rated life insurance companies in the industry. So, we can custom fit the right tools for the job. Contact us today and see how easy it is to get your child or grandchild’s LIRP plan in place.
LIRP for Parents
Don’t forget to check out how powerful a LIRP for parents can be. It’s worth reading.
We want to set up a life insurance policy for our children. I appreciated the fact that you let us know that the actual details of making this plan final can be difficult. We will probably take your suggestion and go to a life insurance professional.