Your Kid Almost Certainly Doesn't Need Savings Through Life Insurance | Series 5.5

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Welcome to the EnjoyMore30s Family Finance

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podcast. The only podcast dedicated to making life more

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enjoyable for young families by hitting on the financial topics

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that tend to weigh on us, stress us out, and distract our focus

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from simply enjoying life.

Joseph Okaly: 00:00:16

Hello, hello, and welcome once again to the

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EnjoyMore30s Family Finance podcast. Every week, I'm here

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talking to you about money so you can take some degree of

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steps forward, gain confidence, and therefore remove that

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financial anxiety that seems to just sit over so many of our

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heads, so you can focus solely on making your life more

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enjoyable. Now this series, we focused on the kids, your kids

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to be specific. And that's why we've called it our Your Kids

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Money Mindset series. And we're going to continue going through

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that with you today.

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So one of the things that we come across a lot is people

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taking out life insurance policies on their kids and it's

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something that in my opinion, is almost always not something I

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would recommend doing. Although that practice is definitely not

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uncommon.

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Now, as always, if you like what you're hearing today, or any

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day, please make sure to subscribe or follow us on Apple

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podcasts or wherever you listen. Clicking that star, leaving that

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review, it really really helps us reach the quite literally

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millions of other young American families out there just like

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you.

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Now last week, we discussed all things gifting because hey, we

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all love gifting to our kids. I certainly do and I'm guessing

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you guys give a lot to your kids as well. That included

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specifically how much you can gift, what happens if you go

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over that limit, but what I hope you focused on the most were the

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really interesting ways to consider gifting, consider

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making those gifts, consider giving that money to kids. So if

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you haven't done that yet, I would definitely recommend to

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check that out soon.

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Now for today, our episode is titled Your Kid Almost Certainly

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Doesn't Need Savings Through Life Insurance. So it's a little

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bit of a long title. So let's break it down really slowly.

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Your kid almost certainly doesn't need savings through a

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life insurance policy, where we're going to cover what have

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often become known as maybe you've heard of the Gerber

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policies and dig into why again, in my opinion, you don't want to

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be saving for your young children through life insurance.

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The goal for today's episode is to better understand how these

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policies work so you can make an informed decision on if this

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actually makes sense for you. So that's the goal for today that I

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want you guys to be walking away with.

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Now, many of you guys out there may be familiar with those

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policies, they advertise on TV a lot, and your parents may have

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even taken one out for you. They probably told you about it one

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day and kind of proudly handed over the policy to you that had

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some degree of value built up in it. And it was a life insurance

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policy, yes, but it also had some savings. So like how

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fantastic it felt like found money. Well, maybe not so fast.

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So here's another one of those things like if you remember in

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5.1, the first episode of this series, where we talked about

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savings bonds, where those kind of those classic steps that a

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lot of people took to save for their children. And even though

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it is something that has been done before that might be

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familiar, that doesn't necessarily mean that it's the

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best approach today, the approach that you want to be

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taking with your kids. And really just like the savings

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bonds, it comes down to a matter of opportunity cost. What

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opportunity are you potentially giving up, that that same money

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that you're using to save, could also be used for instead. So if

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you remember the same example, you have a farmer and he can

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either plant corn or wheat. He chooses corn, corn, he grows it,

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he sells it, he makes some money off of it but we is really the

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money crop that year. Yeah, he made money, but he left some

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money on the table as well, because wheat was much more

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profitable for that year. So the key part here that we're trying

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to accomplish, the key part that we're focusing on, is saving for

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your kid. Now most people use these policies for those

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savings. If they didn't come to you and say, "Hey, you could

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build up savings that could be used for college or even give

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your kid down the road." I'm guessing you really wouldn't be

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as interested in it, right? Because if they just said, "Hey,

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buy some life insurance for your kid and you know, if your kid

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dies, you'll get some money." You know, I don't know about you

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but ensuring I get some money if my kid passes away isn't exactly

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on the top of my things to think about list. Let's just say that.

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As you may have heard me talk about before, the rule of thumb

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when it comes to insurance is to try to cover the catastrophic.

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So if you die and lose the income you are going to earn

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over the next 30 years as a young person in a family, that's

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a big, big problem. I mean, that might be millions worth of

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dollars of earnings that were supposed to come to you that

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would have come to you that are now not going to come. So that's

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a big deal. That's the catastrophic. Or when it comes

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to your home why you have homeowners insurance, if you

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have a broken window or you have a garage door that breaks, you

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could probably figure out how to fix that or pay someone else to

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fix that. If your house burns down to the ground, not so much,

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again, the catastrophic. Your baby doesn't earn any money. And

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when they do down the road, 20 years from now, it's going to be

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for them to live on, not for you anyway, obviously.

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So let's really just focus on that savings component then,

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because that's probably why you would be considering buying one

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of these life insurance policies as the biggest part of why you

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would consider it. Now if we're doing this predominantly to

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save, we want those savings to really work, really grow for us,

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right? When tied to a whole life insurance policy, so that's

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WHOLE whole life policy, which is what the Gerber policies are

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a lot of other policies out there, they work very similarly

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and their whole life policies, your growth is through a fixed

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rate that is not tied, you know, to the stock market or anything

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like that. And it has the fees of all the insurance coverage

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that's built into it. So you're mixing two things together.

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You're mixing together savings and insurance. And the result,

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again, my opinion is it's not going to work as well as it

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could for you. So your policy will likely have no built up

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savings value for the first few years, as those insurance costs

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that you've mixed together with the savings are going to eat

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into most everything that you're going to be giving to them. And

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reading around on the the Gerber policies specifically as they

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tend to be kind of the most well known person or company that out

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there that does this kind of thing. I came across a line of

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somebody that was looking at it saying "the grow up plans, cash

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value grows at a guaranteed rate over time, so that after 25

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years, it should equal or be greater than the amount you've

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paid in premiums." So after 25 years, it should be equal or

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greater than the amount you put in could be less, but it should

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be equal or greater. So let's just say that at roughly $200 a

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year for a one year old, let's say. Which could vary a bit

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based on state and gender, depending on the company, that

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would be you put out $5,000, after 25 years. Let's assume

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that you got back what you put in. So after 25 years, it's

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worth $5,000. That doesn't sound like a great deal, at least to

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me. If you instead took that same say $200 a year and

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invested it for 25 years at let's say you've got 8%, you

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come out with over $14,000. So you can see the difference in

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potential pretty easily there. And as long as you're using a

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diversified allocation fund, you're spreading the funds out

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well in that long term process. In addition, you also get

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control of where these funds go if you save it separately. So a

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tax free 529 plan for college maybe, a flexible joint account

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that you can earmark for them. With these life insurance

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policies, the child generally becomes the owner at age 21. So

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you lose that control of whatever funds built up in the

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policy. Again, a common theme do you want them to have access at

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21? As I kind of talked about when we went through different

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options for you where you could put money away for your kids, I

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at least would not trust my 21 year old self.

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The only time life insurance could be appropriate for a child

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in my opinion, is not for the savings but if there is a

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question of future insurable qualification, from a health

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perspective. If there's some reason to believe that this may

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be the case, whether through family history, or you know,

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some other reasoning, and you don't think that they could

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perhaps get coverage when they are older with the family and

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actually need it, then insurance in general could make sense but

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you would want to kind of evaluate all your options and a

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whole life policy still may not be the best fit when you have

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things like convertible term, or universal life out there. Those

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could also be considered potentially better options

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depending on your specific situation.

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So kind of round this off here and try to end here on a

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somewhat positive note, remember the goal of today's episode.

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What are you trying to accomplish through the life

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insurance policy for your child. If it's savings, if that's the

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biggest reason why you're putting money away into this

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policy, then putting the funds in a place where they have much

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more opportunity to grow could likely get you closer to those

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great life goals that you're setting out for your children

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now.

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So thanks for tuning in today as always. Join us for next week's

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episode called Give Them Education OR Retirement where

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we're going to cover that you don't necessarily have to save

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for your kids for college, or even if you want to to some

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degree you can also save for their retirement either instead

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or conjunction and that may seem really crazy, and you probably

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never heard of that before but it could make all the sense in

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the world when you break it down and you look at the numbers.

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Overall, if you're able to implement what we talked about

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today or any day, then that's great. You have less to worry

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about than before that's the focus. Get that anxiety out of

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there. Give yourself more confidence, go out and focus

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more on enjoying life. If you are wanting help with these

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things, though, or you have questions you need help in

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clarifying, check out the Ask Joe section on the show's

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website, www.enjoymore30s.com. That's enjoymore30s.com. Until

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next week. Thanks for joining me today and I look forward to

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connecting with you again soon.

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The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal, tax, or other

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professional advice for your specific situation. You should

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always seek appropriate advice from a financial advisor,

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accountant, lawyer, or other professional before acting upon

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any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS Securities, Inc., and TFS Advisory Services an SEC

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registered Investment Advisor member FINRA/SIPC.