132-Q&A: Thinking Through Buying Life Insurance on Your Kids' Lives and Clarification on 72(t) Substantially Equal Periodic Payments for Retirees

Jan 13, 2015

When I started recording the show, I planned to answer six questions. But, after finishing the first question and realizing how in-depth the show would be if I covered all six in one show, I decided to break it out into multiple shows.

Today, I cover these two questions:

• 8:41-I'm thinking about buying life insurance on my two kids' lives. What do I need to know?
• 47:53-Will it work for me to use the 72(t) rules to retire at 50 and then change the payment terms at 59.5?

Notes-Life insurance for kids:

• This is one of the most controversial areas in finanancial planning so I'll try to fairly represent the various points of view.
• It's tough to have a low-key discussion here because it's such an emotionally intense subject.
• There are three major philosophies that I've discovered:
  1. Buy lots of life insurance to protect your investment in your kids.
     • Few people in the US will go for this one; much of the world will understand it though.
     • The reality is more and more of us will in fact be depending on our kids as we age due to many factors including the amount of savings most retirees have and financial challenges facing social security and medicare.
  2. Buy just the minimum amount of insurance to cover burial costs.
     • The problem here is that the rich and middle class don't really need it and the poor often don't think of it and can hardly afford it.
     • It's also simply not very high as a priority due to the relatively low risk. Consider this model: http://radicalpersonalfinance.com/do-i-need-insurance-a-mental-model-to-analyze-methods-of-dealing-with-risk-rpf0091/
  3. Buy some insurance for now and as a hedge for the future.
     • Hedge for the future with an Additional Purchase Benefit.
• How to actually buy the policy?
  • The advice is conflicting.
  • People say to buy term policies for kids. But I've never been able to find a company that will sell a stand alone term product on a minor's life. (Let me know if you know of one, please.)
  • If you're buying a big policy (#1 above) and your child is over 18, it's easy. Buy an Annual Renewable Term policy for them.
  • If you're buying a big policy (#1 above) and your child is under 18, it's harder. If you want to get closer to term coverage, consider a stripped-out universal life policy. If you have the cash flow, go with a traditional whole life insurance contract. Make sure it's a contract that your kid will be happy owning forever. Shop carefully.
  • If you're buying a simple burial policy (#2), do it as a term rider on another policy. You can get these at work, bundled with a banking or property and casualty insurance product, or as a rider on your own term policy.
  • If you're hedging now and later (#3), buy a small whole life policy with an Additional Purchase Benefit. That way as health, hobbies, and occupations change, your child will be able to buy more insurance if necessary. Shop carefully.

Notes-72(t) Calculations

• Use this calculator to get an indication of the numbers: http://www.dinkytown.net/java/Retire72T.html
• IRS info: http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments