Issue 3: The Most Valuable Benefit of Life Insurance for Children
The Most Valuable Benefit of Life Insurance for Children
"Just use the debit card," my daughter Meghan said to my wife. Like every kid, my children weren't born understanding the concept of money. To them, you swipe a card here and you swipe a card there and stuff becomes yours. "Just use the card" was a common phrase on Target runs and trips to the grocery store.
Time flies. I have one child in high school, one in middle school, and one in Kindergarten. My kids, even the youngest, are at an age where they now understand what money is. More importantly, they're starting to grasp its value, which is not in the money itself but in what creates it. Things don't show up just from swiping a card. They aren't valued at a dollar amount. They're valued in nights of babysitting jobs, chores around the house, and helping dad at the office.
There are many ways to teach children the value of money, but a Wealth Maximization Account is designed with specific characteristics to benefit your children, both now and in the future, and can be an asset for the entire family.
The Value of Life Insurance for Children
Opening up a Wealth Maximization Account (a whole life policy designed for high cash value) on your children or grandchildren is an incredible way to set them up for a secure financial future. But the life insurance policy itself isn't what changes your child's life, it's the education behind it. Using a whole life insurance policy for children to teach them the value of money is a priceless gift.
This gift to a child or grandchild is more than the cash value of an inheritance or trust fund. It's not about giving them money, although you can certainly use it that way if you wish. I use my children's life insurance policies to teach them the difference between wants and needs, the difference between good debt and bad debt, and to help them understand their intrinsic financial value.
Do children have an economic value? They absolutely do. Their potential is like a seed, ready to be nurtured and cultivated. To maximize their value as an adult, they have to learn financial responsibility at an early age. One of the most effective ways I've been able to teach sound financial practices is by letting my kids borrow against the cash value of their Wealth Maximization Accounts. It allows me to show them the economic value of their life, as well as the unique way they can use it to make purchases.
Family Banking Strategy for Kids
A Wealth Maximization Account is unique in that it allows you to borrow against its cash value while still earning guaranteed interest on the full cash value amount of the policy. You, the parent, own and control your child's life insurance policy. You're the "bank" and can allow your child to take a loan from their policy, while the actual interest in the policy itself remains protected.
Now, when my kids want things, my wife and I decide if we'll let them borrow from their policies, and it becomes their responsibility to pay it back. We call it our family bank. Our children have the opportunity to make purchases that are of value to them, but they must assume responsibility for paying back the loan. It forces them to weigh the value of their time and commit to a payment schedule.
My daughter Meghan has used her policy to buy various types of electronics and a $400 gymnastics mat, amounting to thousands of dollars cumulatively. She had to create a payback plan before she could borrow the money. She felt she could earn enough for the payments by increasing the amount of babysitting she did in the neighborhood. She also researched ways to earn bigger tips by giving better service, such as making little videos of the kids, making sure the house was cleaner than when the parents left, and leaving a handwritten note.
This experience has given Meghan an appreciation for where money comes from, what a loan is, and what interest is, all of which will benefit her in the future. Meghan is also learning the value of her time; an enormous lesson when it comes to her lifelong earning potential. The educational aspect of a Wealth Maximization Account is the most valuable benefit of life insurance for children.
What If My Child Doesn't Pay Back Their Loan?
Failure is part of the process.
When it comes to teaching children financial responsibility, failure to repay a loan can actually provide a more powerful learning opportunity. As parents and the policy's owners, we "repossess" what they bought, whether it be a phone, iPad, bike, or toy. It's far more preferential for a child to "default" on a loan at this stage of life rather than down the road when the stakes are higher, greater things are on the line, and parents have less influence on how a child earns and manages their money.
The policy loan provision of whole life insurance for your children can be used to teach that something must be returned when something is lent. It helps teach kids about debt and interest. It can teach children basic financial principles early in life to prevent financial issues many grown adults struggle with today: high credit card debt, poor payment history, high revolving balances, and borrowing beyond their means.
In Atlas Shrugged by Ayn Rand, she writes, "An honest man is one who knows that he can't consume more than he has produced." Money is spent because work has been done; if the money isn't there, your loan is the promise you will pay it back with future work.
Allowance vs. A Life Insurance Funded Family Bank
Giving kids an allowance is a great way to teach earning and is easier for younger children to grasp, but borrowing from the cash value of a life insurance policy teaches kids spending, which becomes more and more important as they get older.
Great alternatives to allowance are to match your child's payments toward a life insurance loan, split costs, or pay your kids for their services (cleaning the garage, mowing the lawn, etc.). I pay my girls $0.50/book to come box Heads I Win, Tails You Lose at my office.
Leaving Your Children a Lasting Legacy
Legacy isn't just the money you leave behind for your family. It's also the mindset and subsequent behaviors and skills you pass on to your loved ones. It goes beyond the bank account balance or financial statement. Sure, you can transfer financial value to someone, but the source and creator of that value is the true legacy.
One of the saddest things I hear when someone purchases life insurance is, "I'm now worth more dead than alive."
It's not true.
In chapter 6 of my book Heads I Win, Tails You Lose (download the chapter free here), I teach about the parallel between a financial statement and what I refer to as The Human Capital Statement. The income you receive comes from assets on your Human Capital Statement-the assets are your expertise, wisdom, talents, skills, and experience. Expenses are the value you exchange for the expertise, wisdom, talents, skills, and experience of someone else. The awareness of the exchange of value opens a new perspective to the value inside you and the value inside others; it puts humanity in economy and magnifies an appreciation for one another — it's an essential ecosystem.
In a time when credit card debt, student loan debt, and financial instability are at an all-time high, it's more important than ever to give children a financial education and put them on the path to a secure future.
How to Take Out a Whole Life Insurance Policy on a Child
Generally speaking, purchasing whole life insurance for children is easier than obtaining insurance for an adult. Here's an overview:
- Children under 18 usually aren't required to have a physical exam to qualify for insurance.
- The younger the child, the easier it is to qualify for life insurance.
- Children's insurance policies can be up to half the amount of a parent's policy, sometimes more.
- Term life insurance isn't offered for children, only whole life policies.
- Policies can be designed on the amount you wish to contribute monthly, often as little as $50/month.
- If you plan on using the policy as a 529 plan alternative, consider a premium that will hit a target dollar amount by the time your child is ready for college.
- You can start with a small policy and add another policy later.
What Happens at 18?
Does life insurance policy ownership automatically transfer once a child turns 18? No. There are a few options on what to do with the policy at this point:
- Create joint ownership: This allows easier access to the policy for your child, but you may still pay the premiums. This is beneficial if your child is in college or doesn't have full-time work. Its specific structure varies by carrier, and we work with multiple carriers to customize the best strategy for your family.
- Use a trust: To establish a generational wealth plan, a trust can be designated as the beneficiary of the policy, the owner, or both. The language of the trust can establish guidelines for how the policy's cash value is used and what happens with the proceeds of a death benefit, as well as how other assets will be used to maintain alignment with the family's wealth strategy.
- Transfer ownership: If you choose, you can transfer 100% ownership of your child's policy to them at age 18 or older.
While I was growing up, I wasn't taught much about money, investing, business, and entrepreneurship. I had to learn a lot of painful lessons. I have been fortunate to find a financial system from which my kids are already benefiting. By utilizing the characteristics of a Wealth Maximization Account, I've found the best way to teach my children the value of money. Watching them adopt the principles of the Perpetual Wealth Strategy in their own young lives is a priceless gift for the entire family.