• David J. Perrotto

An Innovative Way To Pay For Your Child's Retirement

An innovative way to pay for your child's retirement

For many, COVID-19 has flipped their lives upside down. To say it's been a wake-up call for everyone's morality is a gross understatement. People are discussing life insurance more than ever, with around twenty-five percent of all insurance policies being bought with covid on the policy holder's minds.

Life insurance is a great tool for providing a safety net for your loved ones, especially those who rely on you financially, but it can be also be used for many other things. One of the best things someone can do is buy cash value life insurance for children, which is a permanent life insurance policy. Now, it certainly doesn't make sense for all families to spend money on this sort of coverage. Before you decide whether it's right for your family, here's what you should know about life insurance for kids.

Of of the primary reasons to buy life insurance for your child is guaranteed insurability. What that means is that your child will always be able to get insured even if something happens later in their life. With covid affecting more and more children every day, and with many people getting long term effects from it, it makes more sense today to pick up a policy.


Life Happens is a nonprofit focused on educating consumers about what life, disability, and long-term care insurance are and how these financial tools, along with annuities, can help you put a strong financial foundation in place so that you and your loved ones, and even your business, can thrive financially. Life Happens CEO and President Faisa Stafford says she was prompted by the pandemic to buy life insurance policies for her two teen daughters. "When I started hearing of COVID-19's possible long-term effects and the risks to all age groups, I quickly hopped on the phone with my financial professional to ask about getting my two teens insured with whole life insurance policies that would protect their future insurability," she says. "I didn't want them worrying about not being insurable because of some potential health issues they may develop later in life."

Like a life insurance policy for an adult, a life insurance policy for a child is a contract with an insurance company. Premiums are paid (typically monthly or annually) in return for the promise that the insurance company will pay a death benefit if the child dies. This is typically called "death benefit protection". It's usually paid in a lump sum.

With an insurance policy for an adult, the policyholder/policy owner typically is the insured person-the one who is covered by the policy. With a policy for a child, the child is insured, but a parent, grandparent, or legal guardian is the policyholder. The policyholder also can be the beneficiary who receives a payout if the insured child dies.

Life insurance policies for children typically are permanent life insurance policies, which means they will provide lifelong coverage as long as premiums are paid. Part of the premium goes to pay for the insurance and a portion of the premium goes toward building cash value, usually with market upside, which can be accessed while the child is alive for any reason.

If you want to go over options for yourself or your children, and how life insurance works, don't hesitate to reach out to me at Dave@Perrottowealth.com or directly at (718)551-7131.

One of the key positives is that insurance is usually very cheap at a child's age, and usually, you have 15-20 years to grow the cash value. Why is that important? Let me explain.

First, let me give some startling statistics. Half of all Americans live on less than 24,224 a year. That is less than many people can live on, as well as any actual healthcare costs. Even worse, the average retiree gets only 15,619 a year in social security. This is only half of what many people need to live off of. Let's paint an even bleaker picture. Most older Americans have little in savings. Only 66% of all elderly receive any income from financial assets such as bonds, annuities, or policies. Of those receiving money from them, half receive less than 1,754 a year. I know this sounds terrible for the average 65-year-old today. Let me explain why this is important.

Compound interest is one of the most powerful tools we have available to build actual wealth. What is compound interest? Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. To give you two examples of how this works, I want to introduce Anna and Bob.

Anna starts saving in her employer retirement plan at age 25, putting away $150 per month for 15 years, until she reaches age 40. She contributes nothing for the next 27 years.

Bob doesn't start saving in his employer retirement plan until he's 40. He saves $150 per month for 27 years until he reaches age 67.

What will their retirement accounts look like when they're both age 67?

Anna had a balance of 221,781 dollars and bob had a balance of 121,887 dollars!


Notice that Anna saved for only 15 years and contributed a total of only $27,000. Yet, her balance is higher than Bob's, with most of the increase in her account balance coming from investment earnings on her savings.

Starting later, Bob contributed almost twice the amount that Anna contributed. And even though he saved for almost twice as many years, his ending balance was $100,000 less than Anna's.

Anna's strategy took advantage of the power of time, which can be a very effective multiplier when it comes to saving and investing. Coupling this with compounding growth, and you have something to work with!

So now let's all tie what this means together. Let me give you an example. If we put together a policy for 200,000 of insurance with 100 dollars a month till the child is 21, what will the policy look like when they are 65?

At 65 at a growth rate of 5.8% on average a year, there could potentially be a cash value of 427,000 dollars that can give off 2,300 dollars in tax-free monthly income! This is the power of compounding interest and time. As you can see, of that 427,000, you would have only put in 24,000 dollars of it. That is the true power of long-term returns. So what does this all mean?

You're able to protect your child's insurability, you create a long-term stream of tax-free income for them if they choose to leave the policy alone until retirement, and this also avoids FAFSA for school financial scholarships.

If you want to go over options for yourself or your children, and how life insurance works, don't hesitate to reach out to me at Dave@Perrottowealth.com or directly at (718)551-7131.


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