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)

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Welcome to the EnjoyMore30s Family Finance

podcast. The only podcast dedicated to making life more

enjoyable for young families by hitting on the financial topics

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

from simply enjoying life.

Hello, hello, and welcome once again to the

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

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

steps forward, gain confidence, and therefore remove that

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

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

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

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

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

that with you today.

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

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

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

would recommend doing. Although that practice is definitely not

uncommon.

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

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

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

review, it really really helps us reach the quite literally

millions of other young American families out there just like

you.

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

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

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

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

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

really interesting ways to consider gifting, consider

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

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

check that out soon.

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

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

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

Your kid almost certainly doesn't need savings through a

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

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

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

be saving for your young children through life insurance.

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

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

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

want you guys to be walking away with.

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

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

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

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

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

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

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

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

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

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

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

it is something that has been done before that might be

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

best approach today, the approach that you want to be

taking with your kids. And really just like the savings

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

opportunity are you potentially giving up, that that same money

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

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

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

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

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

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

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

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

your kid. Now most people use these policies for those

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

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

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

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

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

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

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

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

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

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

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

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

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

dollars of earnings that were supposed to come to you that

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

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

to your home why you have homeowners insurance, if you

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

reading around on the the Gerber policies specifically as they

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

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

somebody that was looking at it saying "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." So after 25 years, it should be equal or

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

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

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

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

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

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

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

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

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

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

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

diversified allocation fund, you're spreading the funds out

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

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

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

that you can earmark for them. 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. Again, a common theme do you want them to have access at

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

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

at least would not trust my 21 year old self.

The only time life insurance could be appropriate for a child

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

question of future insurable qualification, from a health

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

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

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

perhaps get coverage when they are older with the family and

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

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

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

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

could also be considered potentially better options

depending on your specific situation.

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

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

What are you trying to accomplish through the life

insurance policy for your child. 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.

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

episode called Give Them Education OR Retirement where

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

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

degree you can also save for their retirement either instead

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

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

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

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

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

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

there. Give yourself more confidence, go out and focus

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

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

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

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

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

connecting with you again soon.

The conversations on this show are

Joe's opinions and provided for general information purposes

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

professional advice for your specific situation. You should

always seek appropriate advice from a financial advisor,

accountant, lawyer, or other professional before acting upon

any content or information found here first. Joe is affiliated

with New Horizons Wealth Management LLC, a branch office

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

registered Investment Advisor member FINRA/SIPC.