Why I Bought A Life Insurance Policy For My Son
And why it was one of my best decisions as a dad.
When expecting a new baby…there is a lot of excitement. Not many people are excited about, let along even think about buying a Child Life Insurance Policy for their newborn.
I had the nursery all dialed in. We had the hospital bag packed. And we had about a hundred things people told us we needed that we never used.
And by the time my son was 3 months old, I bought him a child life insurance policy.
The most common understanding of life insurance is that it pays out a chunk of money in case the insured dies. That’s true…but also kind of morbid. And no new parent wants to think about those things.
But that’s not why I bought my son a child life insurance policy. That’s not why I was excited to buy it for him.
And by the time your done reading this…you’ll be blown away with what is possible with a child life insurance policy.
The Living Benefits of Life Insurance
Yesterday’s complaint about life insurance was “It only pays if I die”.
Today, we can structure living benefits into a life insurance contract that will provide fantastic benefits throughout the course of one’s life.
And as is the case with life insurance…the earlier you get it, the cheaper it is, and the more time you give to compound interest.
The first of the living benefits we built into my son’s child life insurance contract with Accelerated Benefit Riders…or ABR’s.
Accelerated Benefit Riders
A rider on a life insurance contract is simply an option. For the Accelerated Benefit Rider, the policy owner has the option to receive a large percentage of the death benefit up front in the event of a qualifying illness or injury (this may come with additional fees, so be sure and check with your advisor). So, this child life insurance policy not only covers the normal risks associated with life insurance, but also covers the risk of becoming ill.
In the below example, the policy owner could access anywhere from $648,120 to $1,000,000 cash to pay for medical bills.
Medical expenses are one of the top reasons stated for financial ruin, and sometimes health insurance or long term care insurance does not do an adequate job of protecting people from these rising costs.
Of course…as a father, I pray my son will live a long, happy, healthy life, and will never need this.
But, I feel good knowing I’ve done something for my son that could provide the financial assistance he needs at such a critical time.
As fantastic as this is…the ABR’s just scratch the surface of all that will be available to my son from the power of the child life insurance contract.
Cash Value Life Insurance
A permanent life insurance contract is also known as Whole Life, or Cash Value Life Insurance.
And cash value life insurance is older than the US income tax laws. So in the beginning, the cash value was able to grow in a life insurance tax free. And that is still true today.
Cash value is essentially a return of premium. A life insurance company is going to overcharge a bit up front on the premiums to give themselves a margin for error. And if the life insurance company is a mutual company…the excess premiums not used in the cost of insurance is returned to the policy owner. This return of excess premium is known as the policy dividend.
That too is not taxed.
So a whole life insurance contract has cash value that grows tax deferred, and also gains dividends which are not taxed either.
Another fantastic feature is that the cash value has a zero floor…meaning it is guaranteed never to lose value!
Most investments out there go up and down…and we hope for more up years than down. But there certainly aren’t any guarantees.
Here with cash value life insurance, there is a guarantee never to lose value, receive dividends free from tax, grow tax deferred, and if set up correctly, can be accessed completely tax free!
So now this child life insurance contract is getting mildly interesting…but still, we’re just scratching the surface.
We can use the cash value to help fund education.
Funding a college education is expensive these days! Most parents who plan accordingly will use what is called a 529 plan. This is an investment account that grows tax deferred and can be pulled out tax free for qualifying education.
But what if my son doesn’t want to go to college?
What if college becomes obsolete?
With a 529 plan, I had better find someone else that I would like to pay for their education or take a tax penalty.
With the cash value in the child life insurance contract, we can still enjoy tax deferred growth and use it for anything. Plus there is no investment risk associated with this strategy as their is the zero loss floor…guaranteeing the cash value will not lose value.
As a father, I am planning to fund at least part of his education myself. So I pray I wouldn’t have to access the cash value in his child life insurance contract.
But it is always good to have options…right?
So that is nice…but still, we haven’t got to the really cool stuff yet!
Once my wife and I believe our son is financially responsible, we will sign the contract over to him…making him the owner of the policy.
When he is financially responsible…perhaps he has a family of his own (yeah grand babies!!!). If that is the case, he already has a large life insurance policy in place…providing some protection for his own family.
And this is a policy he doesn’t have to pay a dime of premiums into. The contract we designed has the policy completely paid up after 20 years.
He can use the cash value to start a business.
As I’ve said before, the cash value can be accessed for any reason. It is the policy owner’s money!
Let’s assume my son is now 40 years old.
His life insurance contract has cash value compounding for 40 years! There is a video illustration at the bottom of this article that will show you the power of this.
A Financial Advisor has this famous story around our office.
He say’s “In 2008, when so many people lost so much…my clients became rich! They were able to buy franchises at pennies on the dollar all through their cash value life insurance.”
My son would have plenty of capital available to start a business if he wanted to.
Becoming Your Own Bank
By the time my wife and I sign over the child life insurance contract to my son…who will now be a man, I will have to explain to him the infinite banking concept…or how to become your own bank.
If you pull money out of the cash value in a life insurance contract…you don’t have to pay it back.
But doing so puts the contract at risk of imploding…or lapsing. And you would essentially be stealing from your future.
If you pay yourself back…with interest, the contract goes on like nothing happened.
But a really cool thing happens if you pay yourself back a little more than the loan rate.
Since the interest you pay yourself goes straight into the cash value…if you pay yourself a bit more than the stated loan rate, the cash value grows even more than it would have if no loan was taken at all!
Think about this…
The bank makes a great living by charging you interest on a loan.
If you have a cash value life insurance contract you can take a loan from yourself and pay yourself that interest rather than the bank!
So if my son is 30 years old and we give him the contract, he can now buy a new car every four or five years from the cash value.
No need to qualify for a loan.
And no need to enrich the bank…he can enrich himself.
He buys the car outright. And over the course of the next few years, he pays himself back plus a little more than the stated loan rate.
Once it is paid back…his cash value is greater than it would have if he didn’t take the loan in the first place!
Then he can go back to the dealer, and trade his car in for a new one and pay the balance from the cash value again.
And again…once it’s all paid, his cash value is even greater!
This cycle can go on for his entire life! And each time he repays himself…he grows his cash value even more than if he never took the loan.
That is the power of the infinite banking system.
That is how you become your own banker with whole life insurance..
And that is very cool.
But it gets even better!
Guaranteed Lifetime Income*
Another living benefit we placed into the child life insurance contract is the Guaranteed Lifetime Income Benefit Rider. This added benefit usually comes at additional fees, so be certain that the benefit is worth the cost.
At age 65, my son has the option to turn this rider on and start receiving guaranteed income for life…tax free!
His contract has been in place his whole life. His cash value has been compounding for 65 years.
At this age he will be able to receive about 2.8 times the amount of premiums I paid over the course of 20 years every year of his life.
And this is guaranteed…for the rest of his life….tax free!
And that is absolutely cool!
Knowing that by funding a relatively small amount of money every year for the first 20 years of my son’s life…he can have tax free income for the rest of his life!
And now comes the point about my son’s child life insurance contract that gives me chills.
Creating a Legacy Through A Child Life Insurance Contracts
Assuming my son understands and follows the rules for taking loans out of his policy…the cash value continues to grow.
By the time he is in retirement age…that cash value has grown to a very impressive size.
It has grown to a point where even with taking a large amount out as guaranteed income for life…the cash value still grows.
And it compounds year over year.
By the time we are looking at his grandchildren…my great grand children…that cash value is worth a fortune.
There is enough money to make a huge impact on future generations.
I will likely be long gone by this time. My son will be the patriarch of the family.
And his life insurance policy, that we started when he was born could fund generations of education. It could fund anything he wants.
And if he does well with his life and never needs any money from this policy (another one of my prayers)…the cash value could be about 25% greater!
Imagine giving this to your child.
My son will have a contract he owns that will provide
- Tax deferred growth of capital
- Access to that capital for any reason
- Financial compensation if tragedy struck
- Access to a large portion of that face amount in the event of a qualifying illness or injury
- The ability to become his own bank (not giving away money to finance companies for interest…but paying himself and making himself better off each time he takes a loan from his policy)
- Guaranteed lifetime income tax free starting at age 65
- And a legacy that can effect future generations I may never know.
My point is not to brag.
But I do feel like Super-Dad.
Want to discuss how life insurance can effect your family?
Click the button to schedule a time to talk to Conrad Metz, Newport Beach Financial Advisor with Orange County Wealth Management.
*Insurance policy riders such as guaranteed lifetime income or accelerated benefits riders are options available on some insurance products. These options normally come with additional fees and/or policy costs.