How Life Insurance Can Fund Your Child’s Education...While Everyone's Alive

How Life Insurance Can Fund Your Child’s Education...While Everyone's Alive

The Case For Buying A Life Insurance Policy for Your Child

By Stacey Tisdale

I’ll admit it, as a journalist, I am a word nerd. I love examining how closely words match what they are meant to convey. While that was probably way ‘TMI’ about me, it might help you understand why I’ve always been a bit perplexed by the term ‘life insurance.’ Death insurance feels like a much more accurate term.

There is, however, a way in which this type of insurance can give new life to your budget for your child’s education. I will warn you, however, that this will be challenging to absorb.

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Life Insurance for Your Child

Few people can fathom the idea of taking out a life insurance policy for their child. As a parent, I totally relate to how difficult it is to contemplate anything that considers the end of your child’s life.

Few people are also aware of the fact that there are forms of life insurance that have a cash building and investment component which can be used for education expenses while the policyholder, in this case your child, is alive.

Chris Gatty, Financial Advisor

“There’s no question that the concept of insuring children is morbid, but death is not really the primary purpose for this,” says financial advisor Christopher Gatty.

“Yes, you would get a death benefit to help cover things like funeral costs in the event of your child’s death, but there is so much more that can be done in terms of financial planning for things like education costs. It can allow you to fund future expenses that can otherwise be a shock to your or your child’s overall financial plan,” Gatty adds.

How They Work

The types of policies that allow you to do this are primarily variable universal life or whole life insurance policies. Essentially, they allow you to build up a cash value that can be deposited into ‘varying’ accounts, hence the name variable universal life.

That cash can be invested in things like mutual funds, allowing you to grow money in stocks, bonds, and other securities, that will give you a much bigger return over the long term than  other savings vehicles.

The money is also not limited to qualified education expenses like tuition, books, or room and board, allowing you much more flexibility than 529 college savings plan, in which you would pay a penalty for using the funds for other purposes.

“I’ve done this for my own child,” says Gatty. He’s 16-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.”

“It’s important to get over the shock value of thinking of life insurance for a child and think about the benefits it can provide to so many aspects of their lives,” he adds.

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The Tax Man Does Not Cometh

Also, in contrast to traditional college savings plans, the funds you build in a cash value policy are not taxed as income. 

Another important consideration, the value of the policy is not considered an asset, which means it does not have an impact on financial aid eligibility.

Buyer Beware

Some analysts point out however, that these policies aren’t for everybody.

 “Cash value insurance policies can be a lot, and I mean a lot more expensive than other types of life insurance,” says Paula Boyer Kennedy, co-author of The True Cost of Happiness: The Real Story Behind Managing Your Money.

“People should be sure to consult with a financial professional before taking one of these on in order to make sure that it fits within their overall budget, and to make sure that they understand how they work.  These are very complex financial instruments,” she adds.

Protecting Your Child if They Become Uninsurable

No one likes to think about the possibility that their child will become ill or disabled when they’re older, but something could happen that can make them uninsurable. An illness or accident could make them a thumb’s down to most life insurers, or at minimum, make the cost of a policy skyrocket.

In addition, getting life insurance in your child’s name now not only insures that they can be a financial benefit to their loved ones in the future, but the actual price of the policy can also be a lot cheaper than the cost of the same insurance as they age, even if they are a healthy adult.

What’s in a Word

As I said when I started this story, I am a word nerd, and love being as literal as possible with vocabulary. The often overlooked features of cash value life insurance policies not only gives the term more accuracy, but they can also give your child financial support when they need it the most.

While not suitable for everyone, these policies are definitely a financial option that deserves a serious look from all parents.