Whether it’s used for year-end financial planning or for building a legacy strategy, you already know that life insurance cash value can be a great savings vehicle for your clients. But what you may not realize is that you have a unique opportunity to help clients take advantage of another use for life insurance: paying into a policy for a child to give your clients’ children or grandchildren the freedom and flexibility to use the cash value to fund major life milestones.
The idea of presenting a life insurance policy as a meaningful and financially sound gift that clients can provide to a loved one is multifold. Remind clients that the main purpose of life insurance is the death benefit. When you encourage clients to view the policy payments as a gift, the emphasis should be on the fact that clients are creating a future cash resource to help assist with a child’s major expenses or life milestones.
Remind your clients that in addition to the death benefit protection, life insurance creates a tax-advantaged savings pool. It’s designed to grow and accumulate in value over the long term and its value will never decrease if premiums are paid and there are no loans or withdrawals. Essentially, a life insurance policy grants your client the ability to gift a long-term asset to a child that will lay a solid foundation for their financial future.
An Education Savings Tool
Although there are several ways to position the idea of gifting a life insurance policy, one of the most versatile and promising ways to do so is to inform clients how life insurance can be an alternative savings vehicle for college funding and planning.
For example, if a client is paying into a 20-pay life insurance policy in a child’s name from their birth up until they are ready for college, the cash value of that policy will grow over time to help offset future tuition for higher education. The cash value may offset only a portion of tuition.
Clients might question why they would pursue this route instead of using a traditional 529 account to save for education. You should emphasize that although a 529 has benefits, a life insurance policy offers additional flexibility. In the event a child receives a scholarship, or if the child does not end up going to college, the money in a 529 account would be heavily taxed when withdrawn for noneducation-based needs. A life insurance policy provides more freedom when plans for education change.
One scenario to start getting clients onboard with the merits of gifting a life insurance policy is to position it as an incentive for school attendance or performance. Although each client’s financial situation will vary and require a customized scenario, many parents are looking for ways to teach their children financial responsibility. A client can use a life insurance policy as an opportunity to do exactly this.
Here is an example: When a child enrolls in college, their parents may request they take out student loans to pay their tuition. This starts to build credit in the child’s name, but also offers the parent an opportunity to incentivize the child: When you complete college, or perform well in class, then the cash value of the life insurance policy will be used to pay off your student loans.
There are other ways to incentivize education. Perhaps a client wants to offer a child freedom to choose, but also teach financial responsibility while doing so. If a college-bound child is deciding between an in-state university or a more expensive private school, the policy can be leveraged to pay for the more expensive school, or as a post-graduation gift for selecting the more affordable option.
The merits of gifting life insurance to fund education are clearly best suited for clients who are about to have a child or recently had a child, so cash value can grow over time to fund major expenses. For some clients, you can instill the mindset that each time they are expecting a new child or grandchild, it is time to reevaluate their financial planning goals and how that affects their gifting and legacy goals.
Tapping Cash Value
You also can leverage the value of gifting a life insurance policy by emphasizing its ability to act as a cash reserve for a child’s future expenses — beyond education needs — to enhance a young person’s overall financial portfolio.
When your client owns a policy on behalf of a loved one, they have the opportunity of continued saving to expand wealth, or to liquidate the policy and use its cash value. A child might choose to keep growing the policy and use it toward retirement needs, or leave it untouched for death benefits.
The policy can be a great way for clients to teach their loved ones about developing and diversifying their overall financial portfolio, or about the importance of saving for retirement as early as possible. Depending on the financial situations of the policy owner and the beneficiary, the policy can be one of the strongest ways to gift someone financial stability and long-term protection.
Advisors need to get personal and illustrate how a life insurance policy can serve as a truly thoughtful gift with long-term equity and a tangible impact on a person’s life. The most important component that we’ve seen resonate with clients is that life insurance is an asset that offers flexibility and control. It’s gifting someone the freedom to continue to grow assets or to liquidate growing funds to help support a loved one’s life milestones.
Getting Clients On Board
A common misconception among clients is that you must be a high-net-worth individual to gift a life insurance policy. You might hear some clients express concerns that premiums upfront are too expensive and they have more important priorities right now.
Yet clients can customize the dollar amount based on their individual needs. I’ve seen clients pay into policies for a loved one with cash flows as little as $100 per month. It may seem like a nominal amount, but it should be discussed as a long-term instrument that will continue to grow in the two decades before the money may be needed.
Getting your clients on board with giving the gift of life insurance will enhance long-term planning efforts, create effective savings vehicles for expenses like education, or provide tangible impact for future needs. Although clients might not see it right away, you have the ability to show them life insurance is truly a unique gift that gives in so many ways.