E16F8: Set Your Child Up for a Bright Financial Future with this Unknown Plan

Discover the uncovered layers of life insurance as we, Justin Gaines and John Proper, navigate the nebulous waters of policies and protection. Prepare to be enlightened on the true functions of life insurance, extending beyond mere debt settlement and into the realm of safeguarding your family's future. We confront head-on the industry's shortcomings, from the shockingly simple process of obtaining a license to sell life insurance to the detrimental effects of ill-advised agents. Education stands as our beacon, for both clients and professionals, to ensure life insurance serves its intended purpose fully and justly.

Venture with us through the poignant realities of juvenile life insurance, especially in cases involving children with birth defects. Grasping the gravity of such insurance is critical as we discuss how it can deliver a year's worth of income, affording bereaved families the time they need to mourn without the strain of financial concerns. We also examine the versatility of life insurance as a smarter alternative to traditional college savings plans, revealing its capacity to adapt to a family's changing needs. Our mission is to arm you with knowledge, debunk myths, and guide you towards making empowered decisions for your loved ones' financial security.

Transcript

Justin Gaines: 0:00

Welcome to the Bounds Blueprints podcast, where we discuss the optimal techniques for finances and health and then break it down to create an individualized and balanced plan. I'm your host, justin Gaines, here with my co-host, john Prover. In this episode, john and I discuss how to prepare for the worst day of your life and, if the plan is structured properly, how to set your kids up for a bright financial future. Thank you for listening. We hope you enjoy. No, so I guess I'll summarize the basic uses of life insurance and then I'm going to rank them by what I perceive as in the industry, most understood to least understood, and then we'll go through what I consider as one of the least understood uses of life insurance. But I would say the bottom three are probably equally not understood by most individuals in the insurance professional.

Justin Gaines: 0:52

And that's mostly because, in order to get your life insurance license, it varies by state, but in New York, where we are, you take a 40 hour class and you can take it online and that could shoot your life, accident and health. So it allows you to sell life insurance, accident insurance and health insurance If you just wanted to sell life insurance. It's a 20 hour course.

John Proper: 1:14

I didn't notice that quick yeah.

Justin Gaines: 1:16

Yeah, you take a 20 hour course, pass the course. Then you have to go and take a state test. Pass the state test, now you're licensed and you can go sell life insurance. So you wonder why the industry as a whole has a negative stigma around it. It's because you have all these people who are running around with licenses that don't have depth of knowledge. They just have a license to sell and, generally speaking, commissions on a life insurance policy. It varies on what type of life insurance it is, but they can be anywhere from 50% to 110% of the first year premium. So it's an area where there's a high need for it.

Justin Gaines: 1:57

I firmly believe that if everybody understood life insurance, they would own life insurance, because almost every individual has some sort of need for it. It might be a small need, it might be a large need, but just about every single individual has some need for life insurance. Problem is is you have these people who get these licenses and then they prey on that and they just try and sell these massive policies and then people think life insurance is garbage because they've seen a garbage life insurance policy, they've seen it used improperly. So it's not that life insurance is trash, it's just that you have non-professionals selling a product that they don't understand in scenarios that they don't understand, in order to make the most amount of money and you end up with trash products out there, because it's not the product that's trash, it's the application of the product that's trash.

John Proper: 2:50

Yeah, I mean I'll say that makes I have a better understanding, and I see it from their viewpoint now, because the people at the big name places that just sell policies with how hard it is to get maybe a job that pays decent, I didn't know it was that easy to get into. So it's kind of a shame. I'm not justifying what they're doing at all, but now it completely makes sense that these people basically just take a course so then they can make a large amount of money. They don't really care about the person.

Justin Gaines: 3:18

Well, the other issue is that. So the number one problem that you have in the insurance industry? The number one problem that I'm always trying to solve for my business is talking to enough people. Now we take a very educational approach, so the number of meetings I can have in a day is limited because of that, because I'm going to take as much time as I need to educate you on the topics make sure you understand what we're doing, make sure you see how it fits into your plan and also have it where.

Justin Gaines: 3:44

If you go and shop to surround or you go talk to somebody else, you can educate other people, but you also, if you were talking about your plan with a family member or with a spouse, if the spouse isn't in the meeting with me, I would like the spouse to be there. But if you're talking about your plan with somebody, I want you to be able to say why you're doing what you're doing. I don't want you to be like oh yeah.

Justin Gaines: 4:06

I just bought this policy and then somebody gives you an objection to it and you're like I never talked about that, I don't know about that, and you have a good point. That's an interesting thing that we didn't talk about. I want to have that conversation. I'll even tell clients. You know, when you're talking to somebody who doesn't understand this or doesn't like life insurance, this is going to be the pushback that they're going to give you, whatever it may be, and just explain why they're right and why they're wrong, and then why I'm recommending what I'm recommending and where that's beneficial and where the trial backs are and what you're giving up in order to do these things.

Justin Gaines: 4:39

So at the end of the day, no matter what financial plan you're using, there's going to be drawbacks, and I always say I'm the defensive coordinator of the financial planning. So mine isn't the most risky and it also doesn't have the highest rates of return. It's going to position you so that you can take more risk in other areas because you have a conservative nest egg that's allowing you to take risk in other areas. But to get to the list to not draw on this, but to get to the list, I would say the two most common and easily understood uses of life insurance are getting it for debt repayment and income replacement.

Justin Gaines: 5:17

So that's you, go and get a mortgage it's a 30 year mortgage on a $200,000 house. You go and buy a $200,000 term policy for 30 years, you and whoever you're buying with, and that way, if one of you passes away, that term policy, gives the other person the beneficiary the $200,000 to then go and pay off the mortgage and now they don't have to worry about paying that mortgage. The other one, income replacement. You have somebody who is, say, you and your spouse, you make $50,000 a year, or you and your significant other that's living together. If you're both relying on the joint income, this is where income replacement becomes key. Or if you have kids that are relying on your income, that's another scenario. Effectively, if you have dependence on your tax return, you should have income replacement through life insurance, disability, those types of policies. What it does is you look at how many more working years do they have left and then take a multiple of their current income in order to replace that income for the remainder of those working years. What you wouldn't do is so take somebody who's 30, realistically, they're probably gonna work till 65 or 70, so call it 35 years. If you take 35 years at $50,000 of income, that's 1.75 million. But that's not how much you need. You do not need 1.75 million to replace this income because, one, if your income's at 50,000, a portion of that's taxed, and the other piece is that you can take this large nest egg, invest it into conservative areas that have low risk but also lower rates of return, and that's gonna kick out interest and so, with principle and interest, you can replace the income. So, generally speaking, you're gonna look at somewhere between 10 and 20 times whatever your income is, that allows income replacement. So those two very well understood, the most common sales for those very quick, very easy. Now the last three are less understood scenarios and they take a lot more explaining. So I'm gonna just list these ones off and then our podcast is gonna be on the third one.

Justin Gaines: 7:39

So estate planning, using life insurance for estate planning. So that's gonna be managing your tax load, managing transferring of assets to the next generation, creating a legacy for yourself, any of those types of things. Using it in business planning. This can be buy sell agreements, making sure that you're able to. If one of you passes away, the business can continue. Similar to income replacement, but there's tons of scenarios there. You can also use it for employee retention, for your key individuals or also your high performers. If you need to create a financial incentive package but you don't wanna offer it to everybody, there's also ways to do that with life insurance for business planning purposes.

Justin Gaines: 8:22

But then what I would say is probably the most misunderstood or not understood at all scenario is juvenile life insurance policies. So juvenile life insurance just means life insurance on somebody who is under the age of 18. Generally speaking, you can get life insurance on somebody from ages six months to whenever, so six months is really when it starts and then you can go up from there, and those are juvenile policies. The reason why I think they're most misunderstood is because most people think most people understand debt repayment and income replacement, which is, if you have dependents, you need these types of life insurance. Or if you're trying to pass things on to a family member and even if they're not a dependent and you want the house to move debt free, you need that debt repayment so that it's paid off and then they get the house. There's no debt on it With a juvenile. A juvenile doesn't have any dependents. They are the dependent, yeah. So why would somebody need that life insurance? Can you think of any reasons why somebody under the age of 18 would need life insurance.

John Proper: 9:36

I would imagine of common one would be for the expenses of the funeral. I mean, I'm sure that people may have money saved up, but you probably don't. You're not expecting that.

Justin Gaines: 9:47

Right, you're not expecting, you're not thinking about it, and I would say that's the most common answer for juvenile insurance. But I would say that that is, and you kind of touched on it. You might have money for that, you might have money set aside. It's also one of those things that if somebody under the HB team were to pass away, you would find a way to take care of those funeral expenses.

Justin Gaines: 10:09

No matter what it was, you would make it happen Cause, as a parent, you're not going to allow your child to not get the proper funeral services. You're gonna take sacrifices in whatever way possible. Now we wanna make it so that you can not have to worry about that, but more importantly, if you try and put your mind as a parent who's just lost a child, how quickly are you gonna go back to work?

John Proper: 10:39

It's not even imaginable, like really, I have no idea how long it would take to recover from something like that.

Justin Gaines: 10:46

Yeah, I mean you're talking. I mean your work, realistically, your work. Depending on how large of a business you work for family owned business or large corporation you might be given, you're gonna have your sick days, vacation days that you can use, past that they may be generous enough to pay you for some time away they may not. The most generous I've seen is, you know they might pay you for four extra weeks of you working from home or doing.

John Proper: 11:12

Seems reasonable.

Justin Gaines: 11:14

But that's only a month. That's a month. And say you had four weeks, just say it happens early in the year and you haven't taken a vacation and that sort of stuff. You have four weeks saved up, so now you have two months to try and mourn the loss and try and heal. And the reality is two months is not enough time to lose somebody and try and heal. You're still gonna be struggling emotionally, mentally, and so what I use juvenile policies for is, yes, we want some carved away for funeral expense. But my primary concern with juvenile life insurance is making it so that the policy is large enough so that the parents do not have to work for a year at minimum. So if the household income is $100,000, then we would take out $100,000 on each one of the children in whole life insurance. And that's because one the cost is going to be minimal. You're talking $100,000 on, you know, and honestly, it doesn't really matter if they're six months or 17 years.

Justin Gaines: 12:20

the price isn't gonna change because you're paying a minimum premium policy $100,000. You're looking at somewhere between $300 and $500 a year, depending on age, preexisting health conditions, all that sort of stuff, but very inexpensive cost for what you're getting. It allows the parents to not have to go to work for a year and they can just focus on healing, recovering, maintaining the family unit.

John Proper: 12:48

Because if there's also siblings.

Justin Gaines: 12:49

You also have to be there as a support network for the sibling that just lost one of their siblings. You're going through this very tough scenario where all of us hope we never have to experience this, but if that day ever comes, you need to be able to not have to go to work, and so what the juvenile policy is trying to do is, in that scenario, you have massive amount of grief, massive amount of stress. What we wanna do is we wanna remove any and all financial burdens, stress and obligations. We can remove all of that. We no longer have to worry about anything other than grieving, mourning and healing.

John Proper: 13:31

Yeah, yeah, they say. I think I've heard the statement. It's kind of one of the deals with life that when you're born you pretty much know you're gonna be seeing your parents pass, but like no parent should have to see their child pass or something. Right, I imagine too. If I mean, I know you said work may give, and this is generous work may give up to two months, but if the child is, if it's not a sudden thing, if there's things leading up to it hospital visits it could be way more than way more time before it even happens.

Justin Gaines: 14:06

So the fact that a year may sound long, but I can't even imagine what can happen and I'll be honest, most of the parents that I speak with choose to go with longer than a year if they can afford it and make sense, just because if they're truly being honest with themselves and putting themselves in that mindset of, okay, have a child and then just passed away, and you're really trying to put your mindset through it. It's usually a meeting that's filled with tears and emotion because you're thinking about something that you hope never has to happen.

John Proper: 14:37

Sure.

Justin Gaines: 14:39

And almost always they say a year would not be enough. A year would not be enough, and so typically, if we do the calculation based on not taking into account taxes and not taking into stuff, that year worth of income replacement that we're doing could span to a year and a quarter. Year and a half might be able to buy a chemical room, but that's where I say, you know, a year is usually our minimum calculation.

John Proper: 15:09

Yeah.

Justin Gaines: 15:12

Well, almost every parent does agree with is that at a year. A year is the absolute minimum. Yeah, that I would be able to go back to work. You know, at six months I'm not going back to work. Yeah, the maternity leave is usually three to six months. No, you have a baby, you have the baby and then you go back to work three to six months afterwards.

Justin Gaines: 15:32

And that's not even healing from an emotional trauma, it's just healing from the physical and adjusting to life and all those components. So the idea of going back to work after losing a loved one in six months is unheard of and just doesn't seem like the right approach. So then you have the 12 month mark. That seems like okay, I could probably start to have the healing process and then start to look at taking those next steps, but there are limitations on this. So in order for you to have a juvenile policy, you have to have at minimum that amount of life insurance on the parents, and each company fluctuates on this. But the parents have to be insured. Or at least I have had it happen where a parent is uninsurable but we just send in the application, that application health reasons or health reasons.

Justin Gaines: 16:25

Yeah, so uninsurable for health reasons. So they get denied. And then it's allowed because you've at least tried. It's not that you don't have life insurance because you don't want it, it's because you can't get it.

John Proper: 16:36

Yeah.

Justin Gaines: 16:37

You know there's ways around that and that's where working with a professional has experience with it, allows you to be able to have those conversations. But you have to have life insurance on the parents and there's a minimum threshold with each company on what how much of a gap has to exist between the life insurance on the kids and the life insurance on the parents.

John Proper: 16:57

Okay.

Justin Gaines: 16:59

So, and that's just because, if you're going to ensure the kids and you understand the risks associated with the child passing away early, more likely is a parent passing away early and so if you're not going to ensure that risk, why are you ensuring the child passing away early?

John Proper: 17:17

That doesn't?

Justin Gaines: 17:18

that really doesn't make sense, and so you also run into a fraud issue. You know it's just crazy as this may sound, but if you have parents that are just ensuring the kids, not ensuring themselves, oh, that was my first thought. The parents look at. You know, if you have an abusive household and you know they're able to get through the whole process and they, you know, pull a smoke screen in front of everybody and get the child insured and then they end up taking that child's life. You now have, you know, massive fraud scenario.

John Proper: 17:48

And that's. I have to say, that wasn't my first thought. That's, that's crazy. I was just thinking if everyone was in on it, it seems like an easy thing, for not easy, but it seems like a thing people might try and it would be like the child is in on it too, so they would fake, fake that actually fake it that actually doing it would be. I guess both are crazy, but yeah, fake it.

Justin Gaines: 18:10

That I've never actually seen. But you've seen the other there's cases out there where it's happened. I personally am not going to deal with cases where it's happened and it's where a lot of regulation comes from is that you know you can't, you can't get life insurance on your kids if you don't have it on yourself. Because of that, because unfortunately there's sick people in this world and they'll do anything to make a buck yeah, All right, well, I got.

John Proper: 18:34

I got a question then. So ideally you're probably working with clients well before they have kids, so I guess we'll use that scenario. Are you bringing this conversation up? When they tell you, hey, we're planning to have a kid, when they've already had the kid, I imagine the sooner the better. But what happens? Also, if you meet someone who already had a kid like when does this usually pop up?

Justin Gaines: 18:55

So the scenario doesn't so much matter as far as like executing on this and getting a policy in place, whether you have kids don't have kids, I would say, more often than not, because life insurance is misunderstood. It's a scenario where the kids are already 6, 7, 8, 9, 10, and we're having this conversation and then we're putting life insurance on the parents because they don't have life insurance, and we're putting it on the child. But there are scenarios where we have the parents insured already and then they get pregnant. Now we're having the conversation of when this child's born. We should do this and have this plan together, and so we start talking about it that way. And there's ways.

Justin Gaines: 19:45

If you understand life insurance, there are ways. If you have a child that's born with a birth defect, that child will be uninsurable until age 18. It's guaranteed. The child will be uninsurable. The way around, that is, if the agent knows that ahead of time. So say, the child's already born. Obviously you don't know that ahead of time if they haven't been born yet. If the child has been born and you know that they had a birth defect, what you should do is put the policy in place on the parents first. So instead of submitting everything at the same time. Put the policy on the parents in place first with a child term writer, so that puts the term writer on A child term writer, puts life insurance on the children with no parents.

Justin Gaines: 20:36

No questions about. There's no, looking at the insurability of the child. And that writer is convertible, which means once that writer is in place you can then convert that writer into a whole life policy on the child.

John Proper: 20:52

So if you know they wouldn't be able to get life insurance, but you're able to put a $25,000 writer on the policy.

Justin Gaines: 20:58

You can now take that writer, turn it in $25,000 of life insurance on the child.

John Proper: 21:02

Nice.

Justin Gaines: 21:03

Now, $25,000 is not going to replace a year of income, but you're not going to be able to get to that level of insurability. On a child that's had a birth defect. And so what we're doing here is we're putting us into best case scenario. We're getting as much as we possibly can so that we can cover as much of a financial expenses we can and buy ourselves as much time if that scenario were to ever happen.

John Proper: 21:28

But if you, submit if you do it the other way.

Justin Gaines: 21:30

If you submit everything at the same time, the child gets denied. The company can deny you that child term writer and you won't have this conversion option because part of the conversion is going to ask you has the child ever been denied life insurance? And legally it's fraud if you say no. It's not fraud if you know, as an agent, that the child would not have been approved for life insurance but they'd never been denied by a company. It's not fraud. To answer the question has a company ever denied them with life insurance? No, because a company has not. You've just evaluated the risk and said that they most likely would not be eligible. This is the better route to go.

John Proper: 22:09

Right, right. Another thing I thought of too is obviously we went over huge reasons why they get it probably the most important reason. But are there any also cool say cool, but like effects that if a child gets this when they turn 18, the plan can kind of Go roll over?

Justin Gaines: 22:30

Yeah, like you said, we talked about the primary reasons. I typically, given the time horizon of the child and statistical probability that they're not going to pass away, I usually use an index universal life policy on them. The reason being is that the cash value in the policy can be tied to the stock market. We've talked about index universal life in previous podcasts, so go check that out if you want to learn more about this. But it allows for more upside potentials. You're able to get more interest on that. So, effectively, what you can do with this juvenile policy is you can treat it like a 529 college savings plan, where you're putting money in there. When they turn 18, you can transfer the ownership to the child. The child now owns the policy. They can take a loan out, which makes it none of the gains are taxable.

John Proper: 23:16

They can take a loan out against the policy.

Justin Gaines: 23:18

Instead of going to the bank for a student loan, take a loan out against the policy to pay for some of their college or all other college if you've really funded this, overfunded tremendously. Now the benefit to this strategy versus a 529 plan is 529 plans can only be used for college If your child decides to go into the trades, decides to not go to college, decides to start their own business, decides to go into the family business and not go to college. Any scenario where the child's not going to college, that 529 plan is going to be penalized for that.

Justin Gaines: 23:54

This plan isn't, because it's not a 529 plan. It's not set aside specifically for college. That money is set aside for whatever you want it to be. They could sit there, they could go get an apprenticeship, become a plumber and then, five years in, they're 23 to 25, they want to buy their own house. Because now they're making good money. They could borrow against this policy for the down payment for their house.

John Proper: 24:18

That's a no-brainer, then with everything.

Justin Gaines: 24:22

That's where you need a professional knows what they're doing to structure all these things properly and have that conversation with you to say what makes the most sense, what's the best plan for this.

Justin Gaines: 24:31

Because, effectively, what you do, if you structure it properly, you can have it where it's a policy that takes care of and, from ages six months to 18, it's a policy that would replace your income as a parent if something were to ever happen, so that you can grieve and mourn. The minute they turn 18, you can transfer ownership or you could retain ownership and maintain yourself as the beneficiary. That part really doesn't matter. There's nuances to why we would or wouldn't do that, but the money can be distributed from the account tax-free in the form of a loan to the child for starting a business, buying a house, going to college, buying their first car, any of these major capital expenses. It's not like we're just buying life insurance for a plan that's really only good for me, just six months to 18. Once they get to their 18th birthday, we can flip this and now use it as a financial stronghold that we've developed for the child.

John Proper: 25:34

No, that sounds like. One thought I've always had is it's always tough to imagine, when you're having a child and all the new expenses there, to also start a fund for them. But obviously the earlier the better. That just seems like a foolproof way of tons of protection because you're getting life insurance, for many people might come back at you and say a very unlikely thing, which it is statistically unlikely but terrible if it happens. But then that argument completely goes out the window if structured properly, because I'm sure most people at 18 are not set up that well. No, that's cool.

Justin Gaines: 26:12

Yeah, if it's structured properly, you can do it. The other nice part about using an index universal life policy is that the premium on that policy is variable. Like you said, if we're having this conversation with a newborn, expenses are high. You're trying to balance your budget, trying to figure out all of these things. You could start with a minimum premium policy and pay the minimum to have just that pure life insurance. We're looking for the death benefit option.

Justin Gaines: 26:42

Start with the minimum, but then there's also structuring it properly. We want to put as much money in there as possible, so there's a max that you can put in in order to maintain all your tax benefits. So we can start at a minimum to maintain your budget and then, as you get raises through work and you start to bounce out getting used to having a child, that budget starts to work out properly. You can now increase. You don't have to go minimum to max. You can slowly increase. We can make adjustments, but you can change that premium so that you're putting more into it, so that you're achieving some of these longer term financial objectives to the policy.

Justin Gaines: 27:16

Other big part to note on this is, again, if it's structured properly, you putting in that extra money. Some people get wary about that because they're like well, I'm going to put in the extra money and my death benefit is going to be the same. So if the child does pass away, I've paid more than I needed to and I'm still getting the same amount, but paying more. If it's structured properly, that's not true. Your life insurance will maintain the same amount and then your cash value in the policy will be added to that, so you'll get both the cash value and the death benefit back.

John Proper: 27:48

But, again.

Justin Gaines: 27:49

It's got to be structured properly.

John Proper: 27:51

Yeah, thanks for listening to our podcast.

Justin Gaines: 27:54

We hope this helps you on your balance freedom journey.

John Proper: 27:56

Please share your thoughts in the comments section below.

Justin Gaines: 27:58

Until next time, stay balanced.