Archive for February 11th, 2007

Parents and Grandparents! Life insurance for children and grandchildren is a gift, not a jinx!

My experience is that there is actually a mindset, especially with parents, that if they carry life insurance on their child they could somehow increase that child’s chance of an early death. Let me assure you that there is no statistical link between a child’s mortality and whether or not they had a reasonable amount of life insurance.

 Why carry juvenile life insurance? The first reason, the one most parents don’t want to think about, is that even though the chances are very small, occasionally a child will die prematurely. While we all say that we can probably scrape together the money it takes to pay final and burial expenses, the truth is that is the purpose of life insurance.  There is a very good chance that a child’s untimely death will be far more expensive than you would have ever imagined, and a small insurance policy is only going to help defray those expenses, not pay them in full.

Now back to the greater value of life insurance for children. Now that we have gotten over the bump of dealing with the thought that a child might die prematurely, here’s the reality. They probably won’t!

The greater value, the gift in a children’s insurance policy, is the fact that it generally is guaranteed issue life insurance so getting it is not a traumatic event and the policy will generally guarantee the child’s insurability as an adult. I worked with a 22 year old client the other day who had battled leukemia through his teenage years. It appears he has won that battle, but $100,000 of term life insurance is going to cost $1200 a year. If his parents had bought the right policy when he was young, his insurability would have been guaranteed at a rate that would have allowed him to have a universal life policy for about $200 a year. He is an adult paying for his own insurance, and the gift of juvenile life insurance, whether purchased by his parents or grandparents, could be saving him $1000 per year now. It would save money and give him permanent instead of term insurance. That is huge!!!!!

 Parents and grandparents. Give the gift of life insurance!

1 comment February 11th, 2007

Tax free money!!

I try never to assume that everyone knows all of the benefits of life insurance. One that is huge beyond measure for your heirs is that the life insurance benefit that you leave behind is not income taxable. Unlike hitting the lottery, the government has graciously agreed to keep their hands off of your life insurance proceeds and allow your heirs to keep their hands on 100% of what you left for them.

A couple of thoughts along those lines. A study recently showed that about 75% of retired people left much of their retirement behind in the form of unused IRA, 401k and annuity money. They just didn’t need it. While I have encouraged my parents to spend their money, the truth is that like most, they simply don’t need all of it.

The problem is that the inheritance they are leaving behind will be taxable. The solution, once they realize that there is money that will just draw interest until they die, is to use that money to purchase life insurance, turning taxable inheritance into non taxable inheritance.

Another life insurance non taxable event is when a return of premium term insurance policy matures. The way return of premium term works is that, for example, your $500,000, 30 year term policy has a cost of $1000 per year. If you die during ther term, your heirs get $500,000. If you outlive the term, you get an income tax free return of all of the premium you paid in. $30,000 income tax free.

At another time I will speak to the estate tax connections to life insurance and how best to prepare for estate taxes if you have an estate that exceeds the current federal exemption of $2,000,000.

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