At first glance, the decision to purchase a life insurance plan seems contrary to the mantra of “financial freedom.” Somehow, paying an additional bill each month for benefits you will likely never see is supposedly financially prudent? The real world benefits of life insurance are quite the opposite, however. Despite the inherent morbidity of life insurance, its practicality extends far beyond the death benefits that are so commonly associated with the product, especially when an individual has a policy starting at an early age. While a life insurance policy for an elderly family member or friend seems fairly obvious, purchasing a policy for your child may just be the key to long term financial security and freedom.
Raising a child can be an expensive proposition. According to recent statistics from the Department of Agriculture, the average cost for raising a child to age 18 stands at over $260,000. Since this figure is an average, it does not account for those unplanned expenses that can be a severe drain on your finances. Getting your son or daughter to the local elementary school may be easy, but what about when they need to get to college on their own? A car is a necessity, not to mention the astronomical cost of college tuition. Your seventeen or eighteen year old child may be the apple of your eye, but they represent a veritable profusion of expensive investments in both their present and future, especially as parents are just entering the twilight of their careers and looking forward to retirement. How should parents balance these unplanned expenses while simultaneously ensuring a comfortable retirement?
The answer may be a life insurance policy for your teenage child. Some types of life insurance accounts have the option of accruing cash value. In other words, the policy not only becomes insurance in case of death, but insurance in case of unplanned or large expenditure that may not fit your budget. As many parents look towards retirement, they want to ensure that their retirement account is protected against unnecessary risk but also want to ensure its value to be as high as possible. Many retirement accounts lost some amount of value during the economic crash of 2007 and 2008, and the last thing that an account holder needs is an unplanned expense to further drain retirement assets. A permanent life insurance policy may be the key to financial freedom for both parents approaching retirement and children entering adulthood.
Life insurance comes in two distinct forms: term life and permanent life. Term life insurance is purchased for a specific period of time with a renewal option at the end of the specified term. This type of policy only pays a death benefit. A permanent life insurance policy offers more flexibility than a term policy. A permanent policy, as its name implies, has no fixed time limit of coverage as long as your monthly premiums are paid. The main difference, though, is that a permanent life insurance policy builds cash value over time that can be borrowed against. This is done by placing a portion of your monthly premium into a tax-deferred investment account. The policyholder has access to this account after a specified accumulation period after purchase to allow the account to accrue sufficient cash value.
Buying a permanent life insurance policy for your child can be a first step toward financial freedom in retirement. Your retirement savings are protected against the unplanned expenses of raising a teenager and can teach a valuable lesson in financial responsibility. Your son or daughter has the option, once a loan is taken against the account, of either paying or not paying back the account, in which case the cash value is subtracted from the face value of the insurance policy. The risk/reward potential is high, giving a true sense of financial responsibility while freeing your retirement savings from the burden of unexpected expenses.
Written by Joanna Cliff.
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