When you think about life insurance you probably think of getting a policy in order to provide financial security for your loved ones once you’ve moved on.
Did you know, however, that a life insurance policy in your child’s name could provide them with financial resources that could be used to pay for their education and big life events, like buying a home or creating financial stability for their own children?
Needless to say, it’s difficult to even consider life insurance for your child, but I ask you to sit with those feelings for a moment, and think about the following:
- 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
BE.com spoke with Christopher Gatty, a financial adviser for Reby Advisors, about this.
BlackEnterprise.com: Can you elaborate on how a life insurance policy can be used for education costs?
Gatty: 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. 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. The cash you build up in an insurance policy can be used for anything.
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.
I’ve done this for my own child. He’s 11-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.
When it comes to this type of life insurance, primary options are variable universal life or whole life insurance policies. These can be expensive, making it important to speak with a financial professional to see how it fits into your overall plan.