Life Insurance on a Child
It's About the Living Benefit
When looking for growth in savings, it is wise to plan around market-based vehicles. Although, assuming this is the best strategy in all situations is an over-simplification. Different goals call for a diverse range of strategies. For example, saving for children can look very different than planning for retirement. For one, you have to prepare for the inevitability that these children are eventually going to control whatever vehicles you are creating. Will you be setting them up to utilize the asset in the best way once it is no longer under your control?
The Traditional Route
The traditional 529 plan is a nice market-based vehicle, but it is penalized if funds are withdrawn for anything other than educational usage. There is some flexibility in the definition to include things other than tuition at a university. Still, the boundaries might not stretch far enough to include the eventual desired usage of your child. Creating saving through life insurance can be an effective way to build savings for your child while still allowing for complete autonomy in the way it is used.
The idea of putting life insurance on an infant is one that could be met with understandable suspicion. Many advisors will caution against such a strategy and argue for more efficient ways to put your money to work. They have a point. Growth in the cash value of a life insurance policy will not be able to compare to what can be achieved through stock investments. At best, cash value of a life insurance policy should be seen as a conservative strategy that performs better over time than traditional bank accounts and certificates of deposit.
If this strategy is implemented correctly and early enough, the results can be powerful. Through a permanent life insurance vehicle, the cash value will be growing throughout the child’s adolescence to create an available bank of money that can be used at any time for any purpose. If this is specifically done with a policy that has non-direct recognition, it can be used for infinite banking, which can create a lifetime of value for the child by providing a personal bank for loans as opposed to going to a commercial bank.
Better still, the account would be poised to make even more significant increases if the child were educated to make the right decisions moving forward. This means that the leverage they could gain through this account in their twenties would grow exponentially into their 30’s, 40’s, and beyond. This puts them in a position to hand down an even more powerful legacy to the generation that follows them. Thus, this asset is not only something that creates incredible opportunities within one lifetime, but could be leveraged to create opportunities for future generations as well. A properly organized policy has a chance to build a legacy.
This is not to say that a life insurance policy is the best strategy for saving for your child. That would be just as much of an oversimplification as saying market-based vehicles are always the best strategy for growth. There is much to consider when thinking about the goals for saving for your child. The lesson to be learned when considering this kind of policy is this: don’t limit your options.