Whole Life 4 Kids?

Whole life on your kids should come after whole life on yourself — and the numbers below prove it against every intuition. Same $15,000 premium for seven years on a father, a mother, and a daughter: the mother’s cash value beats the daughter’s for most of the first two decades ($180,000 vs. $176,000 at year 15), the parents carry six-figure death benefits the whole time, and nobody had to buy term. I own fourteen policies across six members of my own family — so this isn’t an argument against juvenile policies. It’s an argument about order.

Video Script:
0:06 – Myths re whole life policies for children and then the truth about whole life for kids
1:27 – The parameters of the 3 whole life policies on the family we’ll be comparing
2:09 – Graphing the first 15 years of the daughter, mother, and father whole life policies
3:44 – Challenges behind children qualifying for a reasonable sized whole life policy
4:27 – Looking 40-years later to see the impact on cash value and death benefit
7:26 – Drilling deep into early cash values (spoiler: the kid’s whole life policy loses)
8:49 – The most important reason you should get whole life for children after parents

Where are you with your infinite banking learning journey?

Questions??? Email me at Hutch@BankingTruths.com

Myths About Whole Life Policies for Children

Almost every myth about whole life on kids traces back to one assumption: that a younger insured automatically means lower internal insurance costs, which means better cash value performance, which means more net wealth for the family. It sounds obvious. It doesn’t hold up — and you’ll notice nobody selling kid policies ever runs the parent-vs-child comparison side by side, because the comparison is what kills the pitch.

When you put whole life on a juvenile insured, you actually need substantially more death benefit to avoid a MEC — a Modified Endowment Contract, the classification the IRS applies when premium goes into a policy too fast for the size of its death benefit. One of the ways they test for it is the seven-pay test, which is just the present value of all the future premiums stuffed into the first seven years.

So if you put the same premium on a parent and on a kid — which is exactly what we’re about to do — the kid needs a lot more death benefit to support it.

Worse Early Cash Value, and No Parental Death Benefit

That extra death benefit has a cost, and the cost shows up as worse early cash value performance that takes quite a while to catch up. The long-term performance on kid policies is better. But even that gets eroded, because there’s no parental death benefit in the picture — so the parents still need term insurance, and that term premium comes straight out of the family’s net wealth. And if the parental death benefit comes in the form of whole life instead, it brings two more major benefits with it.

The Comparison: Father, Mother, and Daughter

Three policies: one on the father, one on the mother, one on the daughter. Each one gets its own minimum non-MEC death benefit solve, because different ages and different health ratings mean each of them needs a different amount of death benefit to carry the same premium.

Every policy gets the same $15,000 of premium for seven years, and then a reduced paid-up so all three are operating at optimal efficiency.

Exactly as you’d expect, the daughter starts out with the most death benefit by a wide margin — almost triple what the father has.

First 15 Years: Death Benefit vs. Cash Value

You’d think all that extra death benefit on the daughter would translate into far better cash value. It doesn’t. Over the first 15 years you can hardly tell the three policies apart.

Set the father aside for a moment and compare just the mother and the daughter, and there is more cash value in the mother’s policy for almost that entire time. At year 15 the mother has $180,000 in her policy against only $176,000 in the daughter’s.

The father does end up with a little bit less than the daughter — but it takes all 15 years to get there, and in the meantime, how much term premium did he never have to buy? That’s money he could have put to work at his highest rate of return, which is close to playing with house money, because he’s carrying real death benefit either way.

And that death benefit is not nothing. The father’s policy starts at $378,000 in year one, and paid-up additions grow it to $600,000. Then the reduced paid-up drops it back to $329,000 — notice that’s still more than he started with — and from there the paid-up additions keep pushing it up again.

I wanted you to see that, because of how intuitive the misconception is. Of course a kid’s insurance should cost less. But once you understand that the IRS is going to force the daughter to carry so much more death benefit, you realize the results land pretty close together any way you slice them — the daughter’s numbers and the father’s essentially overlap. A kid policy is not that much better.

And in the meantime you’ve neglected getting a policy on yourself — which is a lot easier to get approved than a big one on a child. Ask a carrier for a million-something of death benefit on a kid and their reaction is, “Oh, wait a second, are we going to show up on Dateline?” A lot of the time they’ll require the parents to carry as much as the child, or close to double it, before they’ll issue anything at all.

Forty Years Later: Cash Value and Death Benefit

Run the same analysis out 40 years instead of 15 and the daughter does have substantially more cash value — $770,000, against $691,000 for the mother and $640,000 for the father. Some of you are already saying, “See, I told you, that’s what we want for our daughter.” Just remember what the ages are at that point: the mother is 86, the father is 87, and the daughter is 56.

Here’s what gets left out of that comparison. When you borrow against cash value for a dynamic retirement buffer, you’re also borrowing against the death benefit — and the death benefit is the bigger number. The daughter has $770,000 of cash value at 40 years. At that same point, the father has almost $770,000 of death benefit.

And the father got there without paying all those term premiums, so that money could go wherever earned him the highest rate of return — that’s closer to finding money on the street than to buying term insurance. The mother, for her part, has an additional $104,000 of death benefit that would pour in for the daughter and her retirement at age 56.

People forget about that. They think cash on cash. But there’s a real opportunity cost to not using life insurance where it gets you your highest rate of return — and that’s the death benefit.

It’s also how you use a policy as a dynamic retirement vehicle rather than just bleeding it down year after year. You draw on it when tax rates are high and when the market is down. Then when tax rates are low and the market is up, you pull from your retirement accounts instead and make the golden goose whole again — at minimum patching up the wounds from those earlier distributions. Do that, and all you’ve really been doing is borrowing against the death benefit.

Put Your Own Mask On First

In this comparison the daughter would have been better off waiting for a death benefit than having her own policy. I’m not saying don’t get a policy on your daughter. But it works the way the flight attendant explains it before takeoff: put your own mask on first, then help your children, because that’s when you’re of the most value to them.

That’s especially true with whole life, because this particular policy also carries a free chronic illness rider. People are far more likely to become too sick or too hurt to handle their daily needs than they are to pass away — and it can happen a lot sooner.

Back the timeline up to 33 years out, when the parents are in their early 70s. The mother’s death benefit is $715,000 and the father’s is $622,000. The daughter’s cash value at that same point is only $512,000.

Near-Term Cash Values, Year by Year

Looking at this as net wealth to the family is a different exercise than looking at any one policy’s balance. But my clients are usually just as concerned about near-term cash value, so it’s worth unbundling year by year — the three policies side by side at five-year intervals, starting in year two.

In year two the daughter does have the most cash value — by a very minute amount.

By year seven, once all seven premiums are in, the daughter has substantially less than the mother and a little bit less than the father too. Year 12 tells the same story. By year 17 she’s finally outrun the father — but it took 17 years to do it. The mother is still ahead at year 17, and the daughter is still behind the mother out around year 22.

So if what you want is maximum capacity early, remember that a policy on a parent also means less term you had to buy on that parent — and on top of that, you’re actually ahead on cash value most of the time anyway.

Before you go running out figuring the best way to do this is to just put it on the kids, run the numbers on yourself first. That’s not theory for us — a family portfolio of policies, parents first, is exactly how my own family’s plan is built. Our team is happy to run your version with you and help you build a family portfolio of insurance to use as your own private bank — for college funding, and as a dynamic retirement vehicle. No generic article can tell you the right order for your family; the ages, health ratings and death-benefit solves change everything.

One more number makes the point. In year two there’s a $15,000 premium due, and the daughter’s policy has $25,000 of cash value to borrow against to keep those premiums paid — say the breadwinner died. Set the same thing up on the mother or the father instead, and there’s $484,000 or $415,000 of death benefit showing up for the family instead.

The next video takes a deep dive into the full life cycle of a whole life policy done on a kid — which I think is a great thing to do, once you’ve put the mask on for yourself and your spouse. Because let’s face it: if one of you were to go away, the other couldn’t be of much help. And if you’re ready to look at your own numbers, use the link below and we’ll model this for your family.

John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA

Founder of BankingTruths.com · 19-year practitioner · 14 family banking policies across 3 companies · independent broker

John “Hutch” Hutchinson has no affiliation or association with The Infinite Banking Concept®, The Infinite Banking Institute, or Nelson Nash, nor his book Becoming Your Own Banker – Unlocking the Infinite Banking Concept; nor with Bank on Yourself, Pamela Yellen, or her book The Bank on Yourself Revolution. “The Infinite Banking Concept®” is a registered trademark of Infinite Banking Concepts Inc. “Bank On Yourself®” is a registered trademark of Hayward-Yellen 100 Limited Partnership.