IUL for Kids – How $200 A Month Becomes A Six-Figure Retirement

Imagine turning the modest sum of $200 a month into a comfortable six-figure nest egg for your child’s retirement. Sounds too good to be true?

Let me introduce you to Indexed Universal Life (IUL) insurance—a financial tool that not only provides life insurance protection but also offers a unique blend of growth potential and safety.

As parents, we constantly seek ways to secure a prosperous future for our children, and IULs might be the hidden gem you’ve been looking for.

In this post, we’ll unravel how a small monthly investment can compound over time to provide substantial retirement savings, setting the stage for financial security and freedom. So, grab a cup of coffee, settle in, and let’s dive deep into this fascinating financial strategy.

Quick Takeaway Points

• An Indexed Universal Life (IUL) insurance policy for kids serves as a strategic investment tool offering tax-free growth when structured correctly.
• Provides your child with a 20-year head start in wealth accumulation by leveraging compound interest.
• Focuses on building cash value accumulation rather than just offering life insurance benefits.
• Before you can get a life insurance policy for your children, you need to have your own policy that is worth at least double the amount of the policy you want for them. This is a requirement to obtain a policy for your children.

What is Indexed Universal Life Insurance (IUL)?

Indexed Universal Life (IUL) insurance is a versatile financial product that combines the protective benefits of traditional life insurance with the potential for cash value growth linked to the performance of selected market indexes, such as the S&P 500. This type of insurance policy offers a dual advantage: securing your loved ones’ financial future through life insurance coverage, while simultaneously providing an opportunity for cash accumulation over time.

Unlike standard term life insurance, which provides coverage for a specific period, an IUL is a type of permanent life insurance. This means it offers lifelong protection as long as the policy remains active.

The cash value component of an IUL policy is what sets it apart. Premium payments are divided into two parts: one portion goes toward the insurance coverage amount, and the other is allocated to an indexed account.

This account’s growth is linked to the performance of a chosen market index, offering the potential for higher returns. However, it’s important to note that while the policy benefits from market upswings, it is also protected by a guaranteed minimum interest rate, safeguarding against adverse market conditions.

Lastly, a significant advantage of the cash value in an IUL is its tax-deferred growth. Policyholders can access this cash value through policy loans or withdrawals without incurring immediate tax consequences, providing a potential source of funds for major expenses, such as college tuition or a down payment for a first home.

Why Consider an IUL for Your Kids?

Setting Them Up for Big Financial Wins

Getting an IUL for a youngster is all about playing the long game. The earlier you start, the more time that cash value has to grow, thanks to both compound interest and the perks of a market index. Over time, this can accumulate into a pot of money that might help fund significant life goals, such as launching a business, paying for a wedding, or securing a decent retirement fund.

Future-Proofing Them with Financial Security

Having financial security nowadays isn’t just about stashing away money into traditional savings accounts. It’s important to tailor your financial strategy to your unique financial situation. This often means taking advantage of financial products that can offer both growth and stability.

By starting a financial growth journey early with an IUL, your kids not only save but also build wealth gradually over the years. Additionally, the cash value accumulated in an IUL can serve as emergency funds, offering financial flexibility in unforeseen circumstances. Time and compound interest? Those are their best buddies in the financial world!

Low Premiums

One of the immediate benefits of securing an IUL policy for a child is the affordability of premiums. Because an IUL is a life insurance policy, the younger and healthier the insured, the lower the premiums. By locking in these low rates early, parents provide their children with lifelong protection at a fraction of the cost.

Tax Advantages

The beauty of an IUL lies in its tax-advantaged withdrawals. When your child needs to access funds for college expenses or other significant financial needs, they can tap into the policy’s cash value by taking a loan from the policy. Since this is structured as a loan, it doesn’t count as taxable income. This allows the savings to be utilized directly for education costs or other expenses, without being diminished by tax liabilities.

Additionally, your child has the flexibility to repay the loan at their discretion. If they choose not to repay it, the loan amount will simply be subtracted from the policy’s death benefit later on.

Educational Financial Support

An Indexed Universal Life Insurance policy (IUL) can serve as a valuable financial vehicle when it’s time for educational expenses. By the time your child is ready for college, the policy may have accumulated a substantial cash value that can be used to help pay for tuition, books, and other college-related expenses.

Guaranteed Protection

You not only get tax benefits with IUL but also a steadfast layer of financial security.

One of the standout features of an IUL policy for children is the guarantee of lifetime insurability. By establishing an IUL policy for children when they are young, you lock in their insurability at the lowest possible rates, regardless of any future health issues that may arise. This guarantee provides peace of mind, ensuring your child will always have access to life insurance without needing additional medical examinations or underwriting hurdles later in life.

What are the Requirements for Parents to Start an IUL for Kids?

Starting an Indexed Universal Life (IUL) insurance policy for your child can be a strategic move to secure their financial future. However, before diving into this investment, it’s essential to understand the key requirements and steps involved in the process.

Death Benefit

The parent(s) must have at least twice as much life insurance death benefit on themselves as will be placed on the child. For instance, if the child is getting a $125,000 starting death benefit, the parents must have at least $250,000 of death benefit on themselves. Either type of coverage will meet this requirement. But what if the parent is uninsured or is having trouble getting coverage? In that case, we highly recommend reaching out to us for assistance. We can help you secure an affordable term policy that meets the necessary requirements.

Age Requirements

Most life insurance companies allow you to set up an IUL policy for a child as young as 14 days old. Starting early locks in the lowest possible insurance rates and maximizes the time available for cash value growth.

Premium Determination

You’ll need to decide on the premium amount and payment duration that suits your budget and financial goals. Children’s life insurance policies can start with premiums as low as $50 per month, but a range of $75 to $150 per month is more typical for policies intended to provide significant future benefits. Consistent premium payments are crucial for maximizing long-term results and ensuring the policy remains in force.

Health and Underwriting

For most child IUL policies, a medical exam is not required. Coverage is usually issued based on the answers to health questions on the application and, occasionally, through a brief phone interview. This simplified underwriting process makes it convenient for parents to get coverage quickly.

Policy Structure and Features

When setting up an IUL for a child, it’s important to work with an experienced agent to structure the policy properly. The policy should be designed as a maximum-funded, minimum-death benefit contract to optimize cash accumulation and minimize insurance costs.

Additionally, parents should consider policy riders and features such as guaranteed insurability riders, waiver of premium for disability, and accelerated death benefits, which can enhance the policy’s value but may adjust the premium.

Long-Term Commitment and Management

Starting an IUL policy is a long-term commitment. If premiums stop before sufficient cash value has accumulated, the policy could lapse. However, once an adequate cash value is built (typically after 5-7 years), the policy can potentially sustain itself through internal charges against the cash value, although this will affect its long-term performance. Regularly reviewing the policy with your agent ensures it continues to meet your child’s evolving financial needs.

Is an IUL Better for Parents or Kids?

If you are debating whether to start an IUL on yourself or your child, the priority should be to have one on the parent first. There are several reasons to put a policy on yourself first, including:

• Financial Protection: If an unfortunate event occurs, the death benefit from your policy can offer financial support for your child.
• Retirement Planning: Children naturally have more time to accumulate retirement savings, so securing your own retirement should come first before focusing on your child’s future nest egg.
• Cost Efficiency: Insurance premiums yield significantly more coverage for a child than for an adult. For instance, a $20,000 annual premium might secure $500,000 in coverage for you, yet the same amount could buy $2,000,000 for a child. However, if a child has $2,000,000 in coverage, remember that the parent must have at least $4,000,000 in coverage themselves. This may not be practical or could be cost-prohibitive for the parent.
• Premium Allocation: Children’s policies typically use smaller premiums, ranging from $200 to $1,000 per month. Such amounts accumulate cash value more slowly compared to adult policies with larger contributions.
• Immediate Financial Needs: If you anticipate needing access to the policy’s cash value sooner, like funding college when your child turns 18, investing more in your policy is beneficial. This accelerates cash accumulation compared to smaller contributions in a child’s IUL policy.

We’ll explore more about managing these funds and alternatives like 529 plans in the following sections.

Can a Grandparent Purchase an IUL for a Grandchild?

Yes! Grandparents can pay for a policy for their own kids or their grandchildren. An IUL can be a very efficient gift and a smart strategy to transfer wealth to a younger generation.

Is an IUL a Good Investment for Kids? 

Indexed Universal Life (IUL) insurance is a beneficial financial product for children, offering lifelong coverage and potential for wealth building. Here’s why choosing an IUL for your child makes sense:

• Wealth Accumulation and Flexibility: An IUL acts as a wealth-building tool, with cash value growing based on market indices like the S&P 500. Growth is tax-deferred, enhancing compounding effects. Funds can be accessed tax-free for education, housing, or business needs, ensuring financial flexibility.
• Market Volatility and Market Risk Protection: IULs include a 0% floor, providing protection for cash value during market downturns and mitigating market risk.
• Tax Advantages: With tax-deferred growth and tax-free withdrawals, IULs offer superior tax benefits compared to 529 plans, allowing you to maximize your resources over time.
• Living Benefits: IULs provide support in case of illness, offering a safety net for medical expenses and other needs.

Indexed Universal Life Insurance serves as a viable savings tool for both children and adults. We can help you craft a comprehensive savings strategy tailored to your financial goals and budget.

If you’re considering cash value life insurance for children, you’re likely familiar with 529 plans as well, which we will discuss below.

Is 529 Better Than IUL for Kids’ College

Here’s the big question, right? Can an IUL do better than a 529?

In an ideal world, you’d have both. But that isn’t always practical. Here are the general differences.

529s are only for education, whereas an IUL for kids can be used for anything. What if your child doesn’t end up going to college? 529s must be used for approved education expenses. It also only applies to colleges within the United States. (Sorry, Oxford is out.)

FAFSA does not ask about life insurance. While some private colleges may ask about life insurance cash value and include it in assets, the FAFSA form does not. This means that saving up for tuition costs in a 529 will show up on the form as assets. That, in turn, may affect any financial aid available. If you keep paying the premiums to boost your child’s IUL, all of those years of hard work won’t make college more expensive in most cases.

529 plans do not have any downside protection. What if the market swings into a downturn or recession right when your child starts college? The portfolio may lose money at the worst possible time. The floor on a properly designed IUL prevents that from happening.

529s also have contribution limits. There’s the total contribution limit. You’ll also trigger a gift tax if you contribute more than that year’s limit.

What do you do with anything left over in a 529? New changes to laws in 2023 now allow some money in a 529 plan to be rolled into the child’s retirement account. But an IUL will stay with your child for the rest of their life.

Learn more about how to fund college using life insurance.

How to Choose the Right Type of IUL Policy for Your Child? 

The first step is to make sure that you have adequate protection in the form of life insurance on yourself. If anyone depends on you financially, then you have a need for life insurance. If you’re not sure how much coverage you should have, use our life insurance needs calculator.

Also, make sure you are saving adequately for your own retirement before helping your child with theirs. If you need help to make sure you are on track, reach out to us.

When you are confident that your own life insurance and retirement needs are being met, then it makes sense to give your child a head start. Think about your budget and how much you are able to save for your child’s IUL. Part of the premium pays for life insurance, so we recommend an amount of $200 or more per month for your child’s IUL.

If $200 per month is out of your budget, you can start with a whole life policy for around $10-$50 a month, depending on your child’s age and the benefit amount. We dive more into children’s life insurance policies here.

Once you know your budget, fill out the form on this page to receive a customized wealth report. The wealth report will compare saving the same amount of money in an IUL, a taxable account, a 401(k), and a tax-free equivalent. The report will show you the future distributions (after tax) from all four options, along with a comparison of the fees and expenses.

Our Wealth Report

We will create this report for you free of charge, and it will provide an excellent education about how IULs work and how they compare to other options. We use the reputable insurance companies based on which one is available in your state. The IUL will be optimized to maximize the tax-free cash and other benefits for your child.

If you’re curious about how indexed universal life insurance (IUL) really works, we’ve put together a detailed guide just for you! Check it out here.

We will review the wealth report with you over a Zoom call to ensure you have all your questions answered. Education is key, and we will ensure you are thoroughly informed about how the policy works and the numerous benefits it will provide for your child.

We have some sample wealth reports below based on children of different ages.

Sample IUL Policies

Here are a few policies to take a look at from one of our favorite insurers, complete with wealth reports.

For these samples, we will look at four ages to start an IUL for your child. Since it wouldn’t be fair to compare the returns for paying for college, we’ve evened the playing field as much as possible and are looking at using the example IUL for kids as retirement income.

We will compare saving $200 a month from the starting age until the child’s 65 birthday and then show tax-free distributions from age 66 to 95. We’ll also include the links to download the full sample wealth reports at the end of the section.

Age Started	Retirement Income Each Year
Less than 1 year	$135,278
5 years old	$103,131
10 years old	$69,121
15 years old	$46,641

If you want the full illustrations, including projections and income out to age 95, click the buttons below for sample illustrations at different ages. 

IUL + Leverage for Your Child

One powerful IUL tactic that is swiftly emerging as our top strategy for building tax-free wealth and a financial safety net is Kai-Zen. This innovative approach can also be used to gift money to a child, provided they are 18 or older. It’s important to note that the parent must qualify to use this strategy by either owning their own Kai-Zen policy and/or possessing a net worth of $3,000,000 or more.

Learn more about how an IUL can be effectively used for gifting and estate planning by reading this article here: IUL for gifting and estate planning.

Next Steps to Building Wealth for Your Kid

Complete the form on this page so we can customize a wealth report for you and your child. We’ll then review it with you and answer any questions you may have.

Life insurance is one part of a comprehensive plan. We are happy to review other strategies as well to optimize your and your child’s future wealth.