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1) Cash Value Life Insurance
The best thing you can do for your child is to get them a cash value life insurance policy as soon as they are born. This is not like the insurance you are thinking of. It’s not like the little paid up policy your grandparents put on you when you were a baby. It’s a machine that generates risk free, tax free cash that can take care of your kid during their life and make them rich. It’s called an Indexed Universal Life Policy.
Here’s how it works:
Most insurance policies are designed to give you the MOST death benefit for the LEAST amount of money deposited. This type of policy makes the insurance fees higher because the company is having to pay a large amount if the person who is insured passes away. The type of policy I am talking about gives you the LEAST about of insurance for the MOST amount of money deposited. This keeps the insurance costs and administrative charges to the lowest legal amount freeing up almost all of your money to grow in an internal account tax free.
Let me show you an example of the account I did for my daughter:
You can see I am only putting $50 per month into this policy. My chiropractor cost $70 per month and my wife’s Purre Barre membership costs $100. We would cancel either of these to keep this account going if it came to that. Her initial insurance is only 50k. I’ll repeat: WE ARE NOT DOING THIS FOR INSURANCE. It just happens to be a part of the deal.
The cash value grows in years when the stock market index grows and doesn’t lose in years when the stock market drops. SO your money is never at risk to the stock market.
Look at the chart above and you’ll see our baby should have about $15,003 in the account when she turns 20. She can access this money tax free if she needs it for any reason.
When you look at the next chart you see it really start to snowball. When she gets to be 48 she should have about $160,249 in her tax free account. She might need some of this money as she may have a family of her own at this point. Also, that life insurance amount has grown to 315k.
The real magic happens when she turns 65. That’s when we turn off the $50 per month and turn on lifetime income. The illustration shows over 527k in her cash value account and almost 650k in insurance. However, if she turns on the lifetime income option at this point she will receive $61,392 tax free for the rest of her life! Even taking this much money out every year her cash value has still grown to over 1.2 million dollars by 76. My $50 per month investment has now made my little baby a millionaire while providing an awesome tax free income for her!
An important thing to consider is that this account is sort of like a swiss army knife. She can take money out early if need be, she can turn income on earlier or not at all. We don’t know what is going to become of our kids lives but with proper planning and a little bit of money invested early we can make sure they have a cushion to fall back on.
If you want us to do an illustration for your children, contact us to set up a 15 minute call or zoom.
2) 529/UGMA Accounts
A 529 account is an account you can set up for your children that has tax benefits if they use the money for college. You can invest the money into a variety of different things and we will typically recommend the money is invested in the stock market in a fairly aggressive manner. The reason for this is the money won’t be used until the child is around 18 so the ups and downs or the stock market won’t negatively affect the use of the money as much as if you were needing to access it sooner. The caveat with these accounts is that in order to get the tax break you will need to use the money for higher education expenses.
A UGMA account is an account that you set up for your children that they won’t have access to until they are 18 or 21. This money isn’t necessarily set aside for college expenses but can be invested in a similar manner. When your child reaches 18 you can sign the account over to them or it can automatically become their money at 21. They might use this money for college but also might use it for a down payment on a house, to start a business, or any number of other things.
3) Get a will
Any of us can die at any moment and it’s important to make sure that our family is taken care of after we are gone. Setting up a will is not pleasant but neither is losing a parent at a young age. It’s our job as parents to do the hard things to make sure our family is protected. If you have young children you can stipulate who is responsible for them after you’re gone, where all of your assets go, and even set specific plans and wishes in place. If you are in Charleston or Summerville the best estate planning attorney is Greg Hyland. He has helped many of our clients out and makes the process very easy and painless. If you are in other areas ask around and see who does a good job or use an online service like legal zoom to walk you through the process.
4) Put your kids on your credit cards
If you have ever struggled with poor credit you probably don’t want your kids to go through that. One of the easiest ways is to call your credit card company and add your children as authorized users on your card. Now, this won’t work if you don’t pay you bill on time but as long as you manage your credit card properly your children will start with great credit. The reason this works is because when they turn 18 they will show 18 years of credit history with a perfectly paid account even though they didn’t do anything but have great parents! You could even make a game of it. On their 18th birthday give them a small box with a present that says “Congratulations! You have been given the gift of an 800 credit score!” Pro tip: you may want to give them a little something else too because even though they will appreciate this later they might not give you the reaction you are hoping for at 18 years old.
5) Get Life Insurance for yourself
If you are reading this right now and don’t have life insurance on yourself what are you doing? Seriously, you can get life insurance for so cheaply and so easily it’s a no brainer. I have 2 life insurance policies on myself. 1 is like what I described for my daughter. It’s a cash value building, tax free growing, income producing asset that will take care of me when I’m older. The other is a term policy I got when my daughter was born. 1 got 1 million dollars of insurance for $79 per month that is guaranteed for 30 years. By that time my daughter will be out of the house, the mortgage will be paid off, and we can convert it to a smaller permanent policy. The point is it’s only $79 per month! You probably spend more than that if you go out with your friends for dinner and a couple of drinks. Also, you might not need 1 million dollars but just make sure you get enough that the debts can be paid and your family doesn’t have to worry about money for a while.
If you have any questions about how to implement these or other ideas for your children connect with us below or email kimsey@hollifieldfinancial.com
