It’s human nature to want to live in the moment. In fact, the last thing anyone wants to prepare for is their final days, gut-wrenching goodbyes, and how your loved ones will move forward after you’re gone.
Life insurance is typically purchased to prepare for those final moments, but what if there was more to this insurance policy than the ironically named “death benefit?” What if the benefits could be used to invest in your child’s living, breathing moments…
The excitement of a college acceptance without worrying about how you’ll pay for it.
Walking through the doors of their first home without stressing about a too-high mortgage.
Keep reading to learn how life insurance can be a tool to provide financial freedom in your child’s future.
Key Terms and Phrases: Life Insurance Edition
Before we dive into understanding different types of life insurance and how they can be used as a means of financial security, it’s important to understand the language and what it means to you.
Below, we’ve provided a quick breakdown of key terms and phrases you may come across when shopping for life insurance for your child or newborn.
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- Life insurance: A means of financial protection for individuals and their families in the event of a loss.
- Insured: The individual whose life is covered by the policy. This can be the same person, or different than the policyholder.
- Policyholder: The owner of the policy who is legally allowed to make changes to the policy, including changing payment details, transferring ownership, and designating a beneficiary. If you take out a life insurance policy for your child, they would be the insured and you would be the policyholder.
- Death benefit: A lump-sum payment determined at the purchase of a life insurance policy that can be used to cover funeral costs, debts, or other financial losses as a result of the death of the insured.
- Beneficiary: This will be the person named in the policy who receives the insurance funds after the passing of the insured.
- Cash value: Represents a designated portion of premium payments you can borrow against, withdraw from, or use to pay premiums. Making a withdrawal typically affects the amount of the death benefit, so be aware of how much you take out!
- Dividend: A refund of part of the premium on participating life insurance policies. These profits can arise from the company’s excess sales and investment returns, expense savings, and lower-than-projected death benefit claims.
Understanding Different Types of Life Insurance
There are many different types and varieties of life insurance policies, each providing its own benefits based on what’s important to you. The two main categories can be split into term life insurance and permanent life insurance.
Term Life vs. Permanent Life Insurance
Term life coverage ensures a person’s life for a set length of time, typically in increments of five years. You can cover your life for 1 year up to 30 years, and the policy only pays out a death benefit if you pass away during your term coverage. After the coverage reaches its expiration date, you would have to apply for another term life policy.
Permanent life insurance, on the other hand, will provide coverage throughout your entire life as long as your monthly or annual premiums are paid. One of the major perks of this coverage is the cash value component, though it comes at a higher price point.
How Does Whole Life Insurance Work? (Including Other Permanent Life Options)!
There are two main types of permanent life insurance that can be used as a financial asset in both life and death: Whole life insurance and universal life insurance.
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- Whole Life insurance: The most common type of permanent life insurance, this policy includes a death benefit and a cash value account. A portion of your premium goes into the account, building over time to eventually allow you to take out a loan against it and use it to help invest in your future.
- Universal life insurance: Universal life policies work similarly to whole life policies, with the main difference being variable premiums and no guarantee on how much you will earn in cash value over time.
Using the Living Benefits of Life Insurance
The biggest moments in your child’s life may well be the ones with the biggest price tags: College, a wedding, buying their first home, you name it! While contributing here and there to a savings account may feel like a good investment, life insurance with living benefits provides some major advantages as a financial savings tool.
Whole Life Insurance for Children
Choosing whole life insurance gives your child a financial safety net in more ways than one. While its primary function is to give financial peace of mind to the ones you love should the worst happen, it can act as a savings account to help in life’s biggest moments.
Some advantages of life insurance as a savings tool include:
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- Flexibility to withdraw or borrow against the accumulated cash value to pay major expenses at your own pace
- Taking out a loan from your policy is essentially taking a loan from yourself–you borrow what you put in and you don’t have an obligation to pay it back. If it’s not paid off at the time of death, the outstanding balance is subtracted from the death benefit.
- Potential to withdraw a certain percentage of your policy’s value in the event of an unexpected or extreme medical emergency
- A set premium for life, meaning that if you take out a policy for your child at 14 days old, the premium will be substantially lower than if they began a policy at 30 years old.
Key Takeaways
Venturing down the path of a children’s whole life insurance policy can provide the safety and financial freedom that so many of us seek later in life. Here are some key points to consider when deciding if life insurance for your children is a good investment strategy:
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- Whole life insurance policies can be taken out on your child when they are only two weeks old – creating a fixed low premium for life and a cash value account that continues to build for the life of the policy
- Provides a financial safety net to combat the worst-case scenario while also giving financial freedom to tackle life’s biggest expenses
- Opportunity to withdraw or take out a loan that may be tax-free and eligible to pay back at your own pace or not at all, lessening the financial burden that comes with taking out loans.
Life insurance for babies can seem odd, albeit a little upsetting, but it provides a means of creating a future for your child free of financial stress.
At Auto Money Title Loans, we believe in securing a future free from financial burdens and building generations that are not held back by unnecessary expenses and loans.
Disclaimer: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. We are not financial advisors, and the content provided does not constitute financial, investment, or life insurance advice from a licensed professional. The content of this blog post does not replace personalized advice from a licensed professional who is aware of your individual circumstances.
Published April 2024
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Reviewed by Executive Team Member at Auto Money
Auto Money offers over 80 locations across the Southeast for individuals seeking extra cash for last-minute expenses like auto repairs, wedding costs, medical bills, and more. As title loan lenders, we practice transparency and compliance with codes and regulatory statutes presented by the SC Department of Consumer Affairs & SC Board of Financial Institutions, Consumer Finance Division.