Written by Kyle J Christensen, CFP, June 28, 2019
One of my fantastic clients asked me today about the idea of adding whole life insurance on kids. This was my response:
My wife and I have whole life insurance on each of our kids, and there are several reasons for that. Here are some of those reasons:
- It’s safe money. Money that will be there. I don’t have to wonder about it. I think it’s really weird that people are gambling with money they hope to use for their kids’ education.
- It’s not about rates of return as much as it is about number of uses. If I had the funds in a 529 plan, I would have to use those funds before my kids could qualify for any financial aid that they otherwise might qualify for (young married college kids usually easily qualify for grants and low-income scholarships). Cash value of life insurance doesn’t count against them when they fill out their FAFSA. They could have hundreds of thousands in whole life cash value, and not one dime would count. When (or if) they do use the funds from the cash value to pay for their education, they aren’t actually withdrawing the funds, so their funds continue to grow in the policy, giving them a chance to pay back the funds over time, and not skip a beat in the growth curve.
- They get four or more years for the funds to grow versus a 529 Plan or another custodial plan. Again, the reason is because the cash value doesn’t count against them for qualifying for student aid. This means they could take subsidized student loans while they are going to school, and then when they are done with school they could use their cash value to pay them off. They wouldn’t have lost a dime of interest in that scenario on the student loans, and they would have gained at least four more years of interest on the cash value. You couldn’t do that with a 529 Plan or Custodial account.
- The death benefit. While my wife and I aren’t too concerned about the death benefit on our kids (although people should have at least some insurance on their kids no matter what), I know they (the kids) will appreciate having it when they get married and start having kids. You never know what will happen between now and then that could make them uninsurable. I know I have met with several individuals over the years who became uninsurable during that timeframe and could never get life insurance again.
- Ownership. With custodial accounts and even with 529 Plans, I sort of have control, and sort of have ownership of the funds. Eventually, however, they have to be transferred. By contrast, my wife and I can own and control our kids’ policies as long as we want. We don’t ever have to give ownership of the accounts to our kids if we choose not to. I like having that control. You never know if one or more kids will end up doing stupid things, or marrying an idiot.
- Financial institutions love creating “one-use” products (i.e. 529 Plans, 401(k)’s, Term Life, Long-Term Care Insurance, etc), because that allows them to control your money longer, and limits (or eliminates) your access to the funds for other things. Life insurance cash value can be used tax-free FOR ANY PURPOSE AT ANY TIME. You just can’t get that with any other product.
- An awesome long-term savings account for my kids. If I teach my kids right, and they listen (this is the key), they will have the best long-term savings account they could ever possibly own by the time they become adults. The cost of the insurance will be non-existent by then. It will simply be a savings tool with a nice death benefit (that is basically free at that point) which hopefully they will continue for the rest of their lives.