By Joel Dansby* on Nov 14, 2020
When one thinks of a college graduation gift the things that come to mind is a new car, an overseas trip, a cash bonus, or maybe a new set of clothes for the job interview circuit. Whole life insurance doesn’t usually make it on most people’s list, however, it could just be the best gift college grads could receive. Why? Well, first off, it is probably safe to say that it is something they wouldn’t buy for themselves. But, more importantly, it is the type of gift that embodies the significance of the transition they are about to make into a life of responsibility and purpose. And, though they may not fully realize at the time, in just ten or fifteen years, when they recognize the importance of life insurance as a foundation in their financial lives, they will be forever grateful its beginnings were formed when they were very young and very healthy.
There are those who might question the wisdom of purchasing life insurance for children, though most planners would agree that families should have some financial protection in the event of the unthinkable. For that purpose, a small policy to cover final expenses usually suffices. In most cases, these policies are transferred to the child when they are old enough to continue making the small premium payments on their own. At issue is whether you should, instead, buy a larger policy with the intent of gifting it to your child when he or she is ready to accept responsibility for it.
How Your College Grad Benefits from a Whole Life Insurance Plan
- It will provide them with permanent lifetime coverage for an extremely low premium.
- The premium is locked in for life at the lowest possible rate based on their young age and excellent health.
- They will begin to learn, early on, the role that responsibility plays in real life.
- It will convey upon them the importance of structured, long term savings.
Why Whole Life?
You have several choices for the type of life insurance plan that would be suitable for a young person. Term life is, of course, the least expensive, however, it offers only a death benefit and no other incentive to maintain the plan. Universal life would be a good choice but it does entail some interest rate risk that could require an increase in the amount of premium and could be subject to lapse if the cash value didn’t grow fast enough.
A whole life plan presents a young person with the best opportunity to lock in low premium rates with no threat of early lapse, and it guarantees an annual increase in the cash value. Some life insurers offer child whole life plans with a feature that increases the death benefit automatically when the child turns 21 at no additional cost.
Tips for Buying a Whole Life Policy for Your Grad
- Buy it before they attend college. We’re not talking about a significant difference in premiums if you buy it early, but it will give the cash values the opportunity to build. When they are presented with a whole life policy with accumulating cash values they can more easily recognize its significance as a savings vehicle.
- Buy as much life insurance as you deem reasonable, but buy enough to make it a solid foundation plan for them. These days $100,000 would be considered a starter benefit. $250,000 would provide solid protection as they begin their own families.
- Buy from a highly rated life insurer. Life insurance is considered to be among the safest of financial instruments, but it is always advisable to own policies issued by companies that are projected to be financially strong well into the future.
- Buy from companies with a solid history of increasing dividends. Dividends are the portion of the life insurer’s profits that are paid to policyholders, and, at some point can be substantial enough to pay all or a portion of the premium.
- Choose the paid-up insurance dividend option. By applying the dividends to purchase paid up additions it enables the cash value and the death benefit to increase faster providing more value and protection as your grad grows older. Purchasing paid up additions is much like buying additional blocks of fully paid for cash value life insurance that builds on top of the policy’s cash value and death benefit.
It may not seem like the most exciting college graduation gift, however, a whole life plan is likely to be the most enduring. Ten, twenty or thirty years after all of the other gifts have been forgotten, their first life insurance plan will still be providing your children with meaningful value. In fact, it may very well be the source of funds that will provide your grandchildren with their opportunity to graduate from college.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.