Artwork for podcast Enjoy More 30s: Family Finance
Your Kid Almost Certainly Doesn't Need Savings Through Life Insurance | Series 5.5
Episode 511th October 2021 • Enjoy More 30s: Family Finance • Joseph P. Okaly
00:00:00 00:11:12

Share Episode

Shownotes

If savings is the goal of life insurance, make sure you understand all the options first.

  • What opportunity are you potentially giving up, that that same money that you're using to save, could also be used for instead. (03:30)
  • "the grow up plans, cash value grows at a guaranteed rate over time, so that after 25 years, it should equal or be greater than the amount you've paid in premiums." (06:46)
  • With these life insurance policies, the child generally becomes the owner at age 21. So you lose that control of whatever funds built up in the policy. (08:03)

Quote for the episode. "If it's savings, if that's the biggest reason why you're putting money away into this policy, then putting the funds in a place where they have much more opportunity to grow could likely get you closer to those great life goals that you're setting out for your children now." (09:23)

Securities offered through TFS Securities, Inc., and Advisory Services through TFS Advisory Services, an SEC Registered Investment Advisor Member FINRA/SIPC. TFS Securities, Inc., is located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Transcripts

Voiceover Audio:

Welcome to the EnjoyMore30s Family Finance

Voiceover Audio:

podcast. The only podcast dedicated to making life more

Voiceover Audio:

enjoyable for young families by hitting on the financial topics

Voiceover Audio:

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

Voiceover Audio:

from simply enjoying life.

Joseph Okaly:

Hello, hello, and welcome once again to the

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

steps forward, gain confidence, and therefore remove that

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

that with you today.

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

would recommend doing. Although that practice is definitely not

Joseph Okaly:

uncommon.

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

review, it really really helps us reach the quite literally

Joseph Okaly:

millions of other young American families out there just like

Joseph Okaly:

you.

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

really interesting ways to consider gifting, consider

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

check that out soon.

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

Your kid almost certainly doesn't need savings through a

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

be saving for your young children through life insurance.

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

want you guys to be walking away with.

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

it is something that has been done before that might be

Joseph Okaly:

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

Joseph Okaly:

best approach today, the approach that you want to be

Joseph Okaly:

taking with your kids. And really just like the savings

Joseph Okaly:

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

Joseph Okaly:

opportunity are you potentially giving up, that that same money

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

your kid. Now most people use these policies for those

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

dollars of earnings that were supposed to come to you that

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

to your home why you have homeowners insurance, if you

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

reading around on the the Gerber policies specifically as they

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

diversified allocation fund, you're spreading the funds out

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

that you can earmark for them. With these life insurance

Joseph Okaly:

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

Joseph Okaly:

you lose that control of whatever funds built up in the

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

at least would not trust my 21 year old self.

Joseph Okaly:

The only time life insurance could be appropriate for a child

Joseph Okaly:

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

Joseph Okaly:

question of future insurable qualification, from a health

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

perhaps get coverage when they are older with the family and

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

could also be considered potentially better options

Joseph Okaly:

depending on your specific situation.

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

What are you trying to accomplish through the life

Joseph Okaly:

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

Joseph Okaly:

biggest reason why you're putting money away into this

Joseph Okaly:

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

Joseph Okaly:

more opportunity to grow could likely get you closer to those

Joseph Okaly:

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

Joseph Okaly:

now.

Joseph Okaly:

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

Joseph Okaly:

episode called Give Them Education OR Retirement where

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

degree you can also save for their retirement either instead

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

there. Give yourself more confidence, go out and focus

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

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

Joseph Okaly:

connecting with you again soon.

Voiceover Audio:

The conversations on this show are

Voiceover Audio:

Joe's opinions and provided for general information purposes

Voiceover Audio:

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

Voiceover Audio:

professional advice for your specific situation. You should

Voiceover Audio:

always seek appropriate advice from a financial advisor,

Voiceover Audio:

accountant, lawyer, or other professional before acting upon

Voiceover Audio:

any content or information found here first. Joe is affiliated

Voiceover Audio:

with New Horizons Wealth Management LLC, a branch office

Voiceover Audio:

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

Voiceover Audio:

registered Investment Advisor member FINRA/SIPC.

Links