How Permanent Life Insurance Can Help Secure Your Child’s Financial Future

Penn Mutual

By Penn Mutual | January 2, 2018

You may be aware of the benefits that life insurance provides for your financial peace of mind, but what about your children? Purchasing a permanent life insurance policy for your kids when they’re young can offer a combination of affordably priced premiums and locked-in insurability for life. Permanent life insurance can also yield something else that may be even more important: cash value.

The younger your children are when purchasing permanent life insurance, the more time the policy has to accumulate cash value. That can be useful for meeting a variety of financial needs as your child grows older:

1. Paying for college

The cost of a college education these days is enough to boggle the mind—and make a serious dent in your wallet. For the 2016-17 academic year, the average cost of in-state tuition, fees and room and board at a public four-year university topped $20,000. The price tag was more than $35,000 for out-of-state tuition at public universities and more than $45,000 at private schools.

Putting money into an education savings account, such as a 529, is one option if you’re hoping to spare your child some student loan debt. But life insurance can also play a role. If you’ve taken out a permanent life insurance policy for your child, you could draw a loan against some of its cash value to cover higher education expenses. Alternately, you could surrender the policy and withdraw all of its cash value at once to foot the bill.

2. Getting a head start on retirement

Young people are constantly bombarded by the message that they need to be saving for their golden years. Unfortunately, many of them still have a nonexistent nest egg. According to the Employee Benefit Research Institute’s latest retirement confidence survey, 34 percent of 25- to 34-year-olds have less than $1,000 saved for retirement.

That’s where cash value from a permanent life insurance policy comes in. Let’s say the policy has accumulated $5,000 in cash value and your child withdraws that money to open a Roth IRA. If they were to add $100 a month to the account from age 25 to age 65, they’d have more than $330,000 saved for retirement, assuming a 7 percent annual return. That could go a long way toward making their later years more financially secure, especially if they don’t have access to a retirement plan through their employer.

3. Covering wedding expenses

Getting married is almost as expensive as earning a college degree. The Knot pegged the average cost of a wedding at $35,329 in 2016, a jump of $2,688 over 2015’s average.

Facing those kinds of numbers, some couples may find themselves turning to credit cards or loans to pick up the tab for the type of wedding they’re envisioning. While that’s one way to pay wedding expenses, it may not bode well for the honeymoon if they’re starting off the marriage in debt, or if they’re adding more debt to what they may already owe in student loans.

Using the cash value from a permanent life insurance policy can help them sidestep high interest credit card debt. Knowing that they have cash value could also make it easier for them to draft and stick to their wedding budget.

4. Growing a mortgage down payment fund

As your child becomes an adult, buying a home and starting a family may be in their sights. Saving a down payment is an important step in the home buying process, but for more than two-thirds of renters, it’s the biggest obstacle they encounter on the path to homeownership.

A permanent life insurance policy may offer a solution to your child’s down payment problem. They could withdraw the cash value to start or add to their down payment savings so that home buying can go from dream to reality.

Permanent life insurance policies are subject to certain eligibility requirements and/or restrictions, and may not be right for everyone, but it’s something to consider as you contemplate your child’s future. A trusted adviser can help you determine if life insurance can help with your family’s financial plan. It’s also smart to speak to someone before withdrawing or borrowing against cash value from a permanent life insurance policy, since accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Loans and other policy withdrawals may be taxable under certain circumstances.

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