By Neil Benedict
Life Insurance
Neil Benedict
I recently met with Maria and Jack, a young couple in their late twenties who had their first child, Sophia, last June. Maria is a teacher in the local school system and Jack is a real estate attorney with an established law firm in town. The purpose of our meeting was to discuss their near and long-term financial goals and how I might help them achieve them.
As our discussion evolved, Maria and Jack concluded that from a life insurance perspective, income protection was their most immediate need. They wanted to be sure that if something happened to either one of them, the proceeds from their insurance policies could generate sufficient income to replace their losses. Together we designed a strategy that provided the right amount of coverage over their entire time horizon. Because of their relatively young ages and good health, the strategy fit within their budget.
Before leaving, I wanted to introduce another idea that many young families don’t often think about: life insurance policies on young children. When I mentioned this to Maria and Jack, their reaction was as expected.
Maria looked puzzled. “Why in the world would I buy life insurance on my child?” she asked. Jack nodded in agreement.
I listened attentively to their concerns before responding. I knew from discussions with many other young family clients that Maria and Jack’s responses were normal. Initially, purchasing a life insurance policy on a one-year-old does sound odd. Children have no income to protect, most are healthy and their mortality rates are extremely low. But the fact that they are healthy and young makes whole life or cash value life insurance a sensible option.
I carefully explained some of the benefits of these policies, particularly for children. First, the policies guarantee (based on the claims paying ability of the issuer) a certain amount of cash value growth over time. Some policies offer the potential for additional cash value growth through non-guaranteed dividends. Second, given the health and young age of a child, premiums for these policies are far lower than adult policies with equivalent face values. Third, there are limited underwriting requirements for child policies. No lab work is required. Finally, a key benefit of child policies is that when designed properly, the child can obtain additional whole life polices as an adult without any additional underwriting until age 46.
To illustrate my point, I showed Maria and Jack an example of a $1 million custom whole policy on Sophia with annual premiums of $6,6000 paid over 20 years. Thereafter, the policy remained in force and continued to grow both cash value and death benefit for the rest of her life, but with no additional premiums due. I pointed out in my example that after 20 years when Sophia would be 21, the cash value in her policy would have grown to $145,000. And when she reached 45, the cash value would have grown to $585,000 while the total amount of premiums paid would have been only $132,000 ($6,600 per year times 20 years). I explained that the cash value in a whole life policy can be accessed tax-free by the policy owner as a loan to be used for any purpose, including education expenses or purchasing a home. (Loans against your policy accrue interest and decrease the death benefit and available cash surrender value by the amount of the outstanding loan and interest.)
Maria and Jack were impressed and began to consider the idea. They could see that a life insurance policy on a child could be a valuable part of their overall financial strategy, but it might not fit within their current budget. I told them this was understandable and that many of my client’s parents purchased whole life insurance policies on their grandchildren as part of their annual gifting strategies. Since the IRS permits taxpayers to exclude up to $15,000 per year per person from gift taxes, an annual premium of $6,600 fits well within that limit. And for the grandparents, it’s a rewarding way to provide a valuable long-term financial benefit to their grandchild.
Maria thought this over a minute. “Jack, I think our parents might be very interested in this. They’re always asking us what they can give Sophia. Neil, would you be available to talk to our parents if they want to learn more about this?”
“Absolutely,” I answered.
Neil Benedict is a financial services professional at New York Life Insurance Company. Neither New York Life Insurance Company nor its agents provides tax, legal or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions. He can be reached at nbenedict@ft.newyorklife.com or 203-940-3158.