Do you remember what your parents gave you when you turned 21? How about 18? Even 13? Was it something really cool, but eventually broke or wore out? Or was it something less flashy, but lasted and actually helped you over the years, like whole life insurance?
Yes, life insurance. And, yes, you are likely to get a blank stare, or worse, trying to explain such a gift if it’s going to a teenager. But this could actually be the so-called gift that keeps on giving.
How? Because whole life insurance can provide:
- An asset for their lifetime (permanent life insurance protection).
- Increasing cash value over time.
- Insurability in the face of uncertainty.
These may not seem important to a child looking for car keys or funds for the next spring break. But, in the far years ahead, it may prompt them to look back and thank you.
An asset for their lifetime
First, you’ll need to explain that whole life insurance is much more than simple term insurance. Whereas term insurance provides a death benefit for a specified period of time, whole life insurance will provide coverage for the life of the insured, provided the premiums are met.
And those premiums are likely to be more affordable than some people imagine. That’s because young people typically command lower rates. And, further, life insurance payment plans can offer a variety of payment terms and timing, so payments can be adjusted to budgets. (Related: Life insurance premium options)
“For parents with a kid going into adulthood, I usually recommend a 12-pay policy,” said Doug Collins, a financial professional with Fortis Lux Financial in New York City. “That allows for the policy to be paid up in 12 years with payments that are usually manageable. The last thing we want to do as financial professionals and parents is to stick a young adult or kid with a premium payment they don’t want to pay because that undoes years of good work. So, by the time they are entering their mid adult years, they already have a significant asset in their portfolio with no more required payments.”
For example, the premium quote for a healthy, non-smoking female turning 21 years of age can be less than $1,700 annually for a 12-year payment policy with a $100,000 death benefit. If they are over the age of majority for their state, the child can be the policyowner while you make the premium payments. Or, if you have reservations about youthful judgment, you can wait to transfer ownership when they are at a more mature age.
As your child moves into adulthood with such a whole life insurance policy, not only will it help provide protection for those who may enter their life, but it can also become a useful asset as they seek out the means to reach life’s milestones, like a mortgage or line of credit.
Whole life insurance has a cash value component, which builds in value as premiums are paid. Also, cash value can increase as the result of dividends paid by an insurance carrier on participating policies. Dividends can be used to purchase additional, paid-up whole life insurance, increasing both the amount of coverage and cash value. And, the additional life insurance may also receive dividends. So there is a compounding effect on the policy value. Dividends are not guaranteed, but some companies have an established history of paying them. MassMutual, for example, has paid dividends every year since shortly after the Civil War.
Cash value can become an important source of funds in the future. For example, the 21-year-old female in the example above would have at least $15,000 in cash value available as she turned 34. Depending on the performance of possible dividends, policy values might be substantially higher.
At an age when house-hunting or other new family matters may be coming into play, that could be a useful source of funds. Or, as she enters her 40s and the cash value climbs to $20,000 or more, it could help with the possibility of college for her own children.
It’s important to know that borrowing against cash value increases the chances that the policy will lapse, reduces the cash value and death benefit, and may result in a tax bill if the policy terminates before the death of the insured. (Related: Treat cash value with care)
Increases in cash value, if left untouched, also boost the size of the policy death benefit over time.
Insurability in the face of uncertainty
Getting older can present challenges for some people as health issues that come with time and age may set in. That can affect the availability and pricing of life insurance, especially at a time when protection for a family, or other loved ones, may be more of a concern.
Already having a life insurance policy in place can help alleviate some of that concern. Better yet, if the policy is equipped with a rider allowing the purchase of additional life insurance at a later age or life event without a medical exam, there can be even more reassurance.
Such riders can add to the premium. In the case of our 21-year-old female, it would add a little over $100 a year, bringing the overall premium to just under $1,800 a year.
Other riders can be available as well. Some waive the need for a premium payment if the insured becomes disabled. Others allow a policyowner to tap the death benefit in the case of a terminal illness or for the transfer of the policy to another. Some riders will add to the premium cost, while others are sometimes included free of charge. (Related: Understanding riders)
A financial professional can help lay out what type of riders may or may not be appropriate for a child, teen, or young adult. And financial professionals working with MassMutual can usually provide an illustration of how a whole life policy might apply to your child in a matter of minutes. (Need a financial professional? Find one near you here, or ask for one to contact you here.)
Yes, a whole life insurance policy may not have the pizazz of a new bike, car, or trip to Europe. But it does have staying power and may offer a way to help a child in the future, even when you’re not there to help anymore.
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