Far too many people around the world today are talking and thinking about the nightmare of young people and children dying too soon. The passing of the late Whitney Houston’s daughter, Bobbi Kristina, is but one example and it weighs on the hearts and minds of millions.
As a parent, I can tell you it’s almost impossible to let your mind ‘go there’ and even think about the possibility of losing a child. It’s unthinkable, unnatural, and unbelievable. Needless to say, it is very difficult to talk to people about getting life insurance for their children I’m going to have to challenge you, however, to sit with those feelings and quiet your mind so that you can really listen to the reasons why you need life insurance for your child:
- The money you build up in the policy can be used for education costs
- Your child will have life insurance in the event he/she ever becomes ill and uninsurable
- You’re helping your child protect his family and have money for life events like buying a home
Black Enterprise had a conversation with Christopher Gatty, a financial adviser for Reby Advisors, about this. Gatty explained why it’s important to keep an open mind about insuring your children as part of your effort to create financial stability for your family, for generations to come.
The concept of life insurance for a child is such a difficult topic to bring up when it comes to financial planning. What are some of the things parents should consider?
Gatty: There’s no question the concept of insuring children is morbid, but death is not really the primary purpose for this. Yes, you would get a death benefit to help cover things like funeral costs in the event of your child’s death, but there is so much more that can be done in terms of financial planning for things like education costs. It can allow you to fund future expenses that can otherwise be a shock to your or your child’s overall financial plan.
Can you elaborate on how a life insurance policy can be used for education costs?
A good option here is a variable universal life policy (VUL). With a VUL, you’re building a cash value.That cash can be invested in different accounts and deliver the returns possible from investing in the financial markets.Â If you can, you should invest the maximum allowed by the IRS. As this money grows, it is not taxed as income. Saving for college this way can also allow you much more flexibility than, say, a 529 college savings plan. That money can only be used for qualified education expenses – like tuition, books, and room and board. You also pay taxes when you withdraw money from a 529 plan. The funds you build in your VUL are not taxed. Another important consideration when you save for college is that, in most cases, the value of the VUL is not considered an asset and does not have an impact on financial aid eligibility.
In addition to education, you’ve said that a life insurance policy can help children pay for big ‘life’ expenses when they’re older.
Gatty: I’ve done this for my own child. He’s 10-years-old. I’m paying about $1,600 a year on a $350,000 policy. By the time he is 50, he can cash out the policy and will have enough to buy a house or provide financial security for his own family. It’s important to get over the shock value of thinking of life insurance for a child and think about the benefits it can provide to so many aspects of their lives.
No one likes to think about the possibility that their child will become ill when they’re older, but something could happen that could make them uninsurable. Can you discuss the ways in which taking out a policy when they’re young can protect them if they do become ill.
Gatty: It could be one of the best things you do for your child. We don’t like to think about the fact that our children could develop disease or illness while they’re young or when they’re adults. The reality is, however, if that happens, they won’t be able to get life insurance for their loved ones and dependents. Think about what that would be like for them and realize how big this insurance can be in their lives.
Gatty adds that when it comes to this kind of financial planning for your children, you’re primarily looking at variable universal life or whole life insurance policies. To understand and maximize the benefits these can offer, it’s important to talk to a financial professional to see how they fit within your overall budget and goals.
-Editor’s Note: This article was originally published July 2015