The hot toy of the year may be at the top of a child’s wish list today, but chances are, it will be stuffed in the back of a closet a year from now. Whole life insurance isn’t necessarily the first thing that comes to mind for those who want to give their children or grandchildren a gift that truly lasts a lifetime. Given the flexibility that it provides with guaranteed life insurance protection and cash value accumulation, many clients could benefit from giving it a closer look.
This concept can help your clients set an example of financial responsibility and emphasize the importance of protecting their loved ones. It can be especially effective with parents or grandparents who bought, or are buying, whole life insurance and already understand the value it provides.
Advisors can help clients find an affordable whole life insurance policy that allows them to pay off all premiums while the child is young and gift the policy to the child when they are an adult. Not only will the child enter adulthood with a life insurance policy in place, they will also have the flexibility to access to funds if and when they need them1.
Lower Premiums and Guaranteed Protection
Age and health are typically major factors in determining the cost of a life insurance policy. By buying a policy for a child, clients lock in lower premiums and guarantee coverage for life. Any health issues their children may have later on won’t affect costs or level of protection.
For an additional cost, some life insurance policies can also offer the insured the option to purchase additional insurance later on — again, regardless of health status. This opens up even more retirement- and estate-planning options for the insured individual.
Flexible Payment Periods
Clients can choose from a range of premium payment periods to tailor the terms to their particular goals. In some cases, it may make sense to pay all the premiums on a policy before transferring ownership to the child, either in a lump sum or over a period of 10 to 20 years. In addition to helping children avoid having to make any premium payments, fully funding the policy ensures children can use its cash value if they need it.
A Flexible Source of Funding
Providing for a young child’s financial future can be complicated by the fact that you don’t know what their specific goals and needs will be in adulthood. You could, for example, put money away in an account earmarked for college expenses. But if the child winds up receiving a full scholarship, or opting out of college altogether, nonqualified withdrawals may be taxed and penalized.
The cash value of a whole life insurance policy offers much greater flexibility. Whether they’re looking to pay for college, buy a home, start a business, or plan a wedding, they’ll have a versatile funding source at hand. Alternatively, they can choose to hold onto the cash value and treat the policy as a retirement-and estate-planning tool.
It’s important that advisors educate clients on how these distributions work. Because taking distributions from a whole life policy reduces the cash value and eventual death benefit, policy owners should make withdrawals against cash value strategically, considering the implications for their overall financial plan.
A Diversifying Investment Asset
Diversification is a fundamental risk-management tool. Because its cash value grows independent of market activity, a whole life policy can help diversify your clients’ overall financial strategy. Some policies pay dividends as well, which policy owners can receive in cash or as paid-up additional life insurance. As adult children begin planning for their own retirement, a whole life insurance policy can provide additional diversification through an asset that does not move in tandem with stock or bond markets.
Ownership Structure and Taxes
A whole life insurance policy that covers a minor can be owned by parents, grandparents, or a trust. Advisors should guide clients in choosing the right policy and structuring its ownership to suit their financial situation and minimize tax liability.
Introducing clients to the often-overlooked benefits of a whole life insurance policy may guide them toward a valuable gift they would not otherwise have considered for their children or grandchildren. With that gift, they can offer something with lasting value that affords opportunities to help build a successful, financially secure life for generations to come.
1 Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty if the policyowner is under age 59½.
Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Participating whole life insurance policies are issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, you should know that there may be little to no cash value available for loans in the policy’s early years.
The information provided is not written or intended as specific tax or legal advice. MassMutual®, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Participating whole life insurance policies issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Reprinted from Wealth Management, [insert date]. Used with permission.
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