IUL for Kids: Should You Buy an Indexed Universal Life Insurance (IUL)?

Investing in an Indexed Universal Life (IUL) policy for your child is not just providing them with life insurance coverage, it’s creating a financial tool designed to grow and adapt throughout their lifetime, and giving them options.

Let’s explore why an IUL can be a great choice for your child’s financial future.

Here’s another resource that explains life insurance for children a little more broadly.

What is Indexed Universal Life Insurance?

Indexed Universal Life (IUL) insurance is a type of permanent life insurance that combines long-term security of a life insurance policy with the growth potential of market-linked investments.

IULs offer flexible premium payments and the ability to accumulate cash value, based on the performance of a stock market index like the S&P 500, while protecting your investment with a guaranteed minimum interest rate.

It’s a safe place to deploy money you would otherwise be saving for your child’s future.

The Benefits of an IUL Policy

• Cash Value Accumulation: Unlike term life insurance, IULs offer a cash value component that grows tax-deferred. This can be accessed via policy loans or withdrawals, providing financial support for needs such as college tuition or a down payment on a first home.
• Tax Advantages: The policy’s cash value grows tax-deferred and beneficiaries can receive the death benefit tax-free. Withdrawals can also be made tax-free if managed properly, underlining the tax advantages over traditional savings accounts and IRAs.
• Lifelong Coverage and Living Benefits: As a permanent life insurance policy, an IUL provides lifelong coverage with the added benefit of living benefits, which can be accessed in case of chronic or critical illnesses, ensuring financial support when it’s most needed.

Common Questions About IULs

Here are some common questions we get from parents or grandparents considering buying an IUL for kids or grandkids.

1. Is an IUL a good option for a child? Yes, it absolutely can be. The reason is because starting an IUL early capitalizes on your child’s young age and capturing lower insurance costs paired with maximized time for cash value growth, especially when you its a max funded IUL. Also, you can’t purchase term insurance on a child, so if life insurance is something you want for your children, you’ll need to choose some type of universal or whole life policy.
2. What is the minimum age to open an IUL? Most life insurance companies allow policies to be opened for children just a few days old, you just need to work with a life insurance agent to make sure there is a clear insurability.
3. How does an IUL compare to a 529 plan? Unlike a 529 plan, which is limited to educational expenses, an IUL is a type of cash value life insurance and allows you and your child to use the funds for any purpose without an early withdrawal penalty.Make sure you fully understand Loans and Withdrawals and choose the right path at the time you’re ready to leverage the income generated from the policy.
4. Potential drawbacks of IULs? The main considerations include the cost of premiums and the need for ongoing management to maximize benefits. However, the long-term growth potential and financial flexibility often outweigh these concerns when you land on a budget that makes sense for you.

Examples of IUL’s for Kids

Example 1: Buying a Child’s IUL Early

• Scenario: Sophia’s parents open an IUL when she is born, contributing $150 monthly.
• Outcome: By her 18th birthday, assuming a moderate growth rate, her policy’s cash value has grown substantially, enough to fully fund her college education or serve as a substantial down payment on her first home. The other option is Sophia takes the policy over and continues to contribute to the policy for future leverage.

Example 2: Comparing Early vs. Later Start

• Scenario: If Sophia’s parents had waited until she was 10 years old to start the same IUL, the total accumulated cash value would be significantly less by her 18th birthday, demonstrating the power of compounding interest and the importance of an early start.And, her cost of insurance would be that of a 10 year old vs. a new born which can substantially impact the cash value growth in the first 10 years of the life of a policy.

Why Choose an IUL for Your Child?

An IUL insurance plan for your child can be a proactive step towards empowering their future financial independence.

With its combination of life insurance protection, flexible use of funds, and significant tax benefits, an IUL is a compelling choice for parents looking to invest in their child’s long-term financial well-being.

We see a lot of people choosing a universal life insurance policy for children for various reasons such as future ability to care for special needs siblings (large part of family estate planning), contributing to family trust to protect assets, and other very specific topics.

Get an IUL Quote for Your Child Today

Interested in learning more about how to open an IUL  and tailoring it to meet your child’s financial goals and needs?

Contact our team of insurance agents today to explore your options. We’re here to help you navigate the complexities that can accompany financial planning and play our specific role as life insurance experts to explain how life insurance works and ensure a prosperous future for your loved ones.