What Are the Best Ways to Build Wealth for a Child Beyond a Trump Account?

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Mark Lyons, Director of Sales, Financial Solutions - Life Marketing at Senior Market Sales^® (SMS), discusses ways agents can help clients think about building wealth for children, including Trump Accounts, 529 plans and indexed universal life insurance (IUL).

Q. What are the best ways to build wealth for a child beyond a Trump Account?

A. There are a lot of different ways to build wealth, including Trump Accounts. They have a lot of great benefits. They accumulate money for a long period of time in a tax-deferred manner. They're fantastic.

If you're also looking for additional strategies, you can look at indexed universal life insurance (IUL). You can look at 529 plans.

An IUL policy is another option families may consider because, when appropriately structured and funded, its cash value can potentially provide flexibility for a variety of future needs.

When presenting IUL as an option, carriers caution against positioning it primarily as an investment, savings, retirement or tax-advantage accumulation vehicle in a manner that obscures its nature as life insurance or the underlying insurance need. It’s important to point out to clients that IUL is a life insurance product with cost-of-insurance and other policy charges that can affect cash-value accumulation.

Q. Why should agents be talking to clients about building wealth for their children right now?

A. There have been a lot of studies over the years that show that the economic benefits to having wealth are very great, and the earlier you can get started with children, the better off their economic future is going to be.

One is because they have financial security, so they can withstand the ups and downs in the marketplace, and they can build that wealth that they desperately need for the future.

Also, they have better opportunities. People typically with higher educations do better. People who start businesses or purchase a home can also do better economically in the future. And so we always want to give children that economic head start if it's possible.

And finally, it's the power of compound growth. We know that is so important to savings. The longer time horizon somebody has, the more wealth they can accumulate. And that's why it's so important that they talk about it now.

There have been a lot of vehicles that were designed in past years by congressional folks — IRAs, 401(k)s, Roth IRAs, Roth 401(k)s, 529 plans, Coverdell Education Savings Accounts — and they all revolve around this idea of accumulating wealth for a particular purpose.

Q. What does an agent need to know about Trump Accounts before discussing alternatives?

A. Eligible children may qualify for a $1,000 Treasury pilot-program contribution through a Trump Account. The government provides free money, and so you don't want to miss that opportunity.

Second, if you have an employer that is providing Trump savings accounts and they have matching funds for them, you should absolutely do that.

You don't want to ever turn away free money. These are primarily retirement savings tools. So when the child reaches 18 years old, it turns into an IRA. The focus is for retirement.

Q. When might an IUL make sense for a child?

A. An IUL makes sense when a parent or grandparent desires to have additional wealth accumulation strategies or products available to them that are designed for more than one purpose solely.

Q. How does an IUL give families more flexibility?

A. A properly structured IUL with substantial cash value can be used for a variety of purposes, rather than being designed primarily around a specific goal, such as a Trump Account or education savings with a 529 plan.

Q. What are the tax advantages of using an IUL to build cash value for a child?

A. There are three main tax advantages to using an indexed universal life insurance plan. And that's the same for adults as it is for children.

First, you have tax-deferred growth in the cash value.

Two, you have tax-advantaged distributions through withdrawals and loans, and they may remain tax-free if it's done correctly. Policy loans and withdrawals can affect policy values and death benefits and may have tax consequences, including if the policy lapses or is surrendered with an outstanding loan.

Some circumstances may make a death benefit taxable.

And third, you generally have a tax-free death benefit — there are certain unusual circumstances in which the death benefit could be taxable.

The key is that it has to be a properly designed IUL. So what you really want to focus on is maximizing the amount of cash that you're putting in the policy for premiums as it relates to the death benefits, and you really want to pick the right plan. There are a lot of IULs out there that don't allow for issue ages 0 to 18, and there are a lot of them that don't allow for preferred rates for children.

Q. Is there financial underwriting for an IUL on a child?

A. There are some concerns with financial underwriting for life insurance for children.

First, the parents have to have insurance coverage themselves.

In addition, all the children of those parents have to be treated equally. So they all have to have the same amount of insurance. Typically, when parents or grandparents want to make contributions to life insurance plans for multiple children, they will want to pay the same amount for each child. Sometimes those death benefits may be a little bit different.

Third, it's important that the death benefit is not excessive. If we get death benefits on children that go too high, then the company will decline the coverage.

Q. What can IUL cash value eventually be used for?

A. The cash value in an indexed universal life insurance policy can be used for most anything. A lot of the common uses are for college expenses. Now, this won't work if the life insurance plan was started when the child was 16. That two-year period doesn't give enough time for the cash value to grow. But if it was taken out when the child was one, yes, there may be substantial amounts of money in there that can be used for college expenses.

It could be used for a first-time home purchase. It's also great for emergencies. We all run into these moments in our life when the air conditioner breaks or the refrigerator breaks, and it puts a great financial strain on somebody to buy something that's new, like that appliance, and not have to pay for it for years and years. You can pull the money out of a life insurance plan and use it for that and not disrupt your financial life.

It also can be used for retirement. And this is, again, the benefit of a Trump Account. But can you imagine that money growing tax-deferred for 60 years? That could be quite a sum of money.

Additionally, you could 1035-exchange it into another life insurance plan. Perhaps the child, when he's an adult, needs substantially more life insurance. So you could 1035-exchange it into more of a protection-based life insurance plan and less of an accumulation-based life insurance plan.

Or you can 1035-exchange it into an annuity and have a retirement income that's guaranteed.

Or you could 1035-exchange it into a life- or annuity-hybrid long-term care product. So just imagine that if you have that money at your disposal to put into a product like that in the future, that's going to provide great economic benefits.

Q. Which clients might be good candidates for an IUL strategy for a child — and which might not be?

A. The clients that we should be looking at for potentially being interested in an IUL strategy for a child are the parents who already have a strong affinity for life insurance. They've already seen the benefits. They already have it. They recognize that it's a good strategy.

Two, they don't like paying taxes. Because this plan is so tax-advantaged, I think it's a very strong indicator that the client will like it.

And finally, those parents who are interested in different wealth-building strategies and designs and products, they're the people who will really, I think, embrace this. So if you’re an advisor advising your clients on other financial matters, this is one that they will be interested in as well.

And of course, the child has to be in good health. They can't be very sick to make it work.

One of the issues is going to be affordability. One of the things that has to happen when you're going through the application process is the follow-up for the financial underwriting.

The things that the underwriters will look at are whether the parents have an adequate amount of coverage and whether all the children have an equal amount of coverage as well. If nobody has any life insurance on them currently, it becomes an additional bill or expense that someone has to cover.

And finally, some good candidates will be clients who have gone through one of those economic challenges that, if they had had a cash-value life insurance policy, it would have solved the problem.

Q. How should an agent start this conversation with parents or grandparents?

A. I think an advisor starts this conversation with parents or grandparents by making one statement and asking one question. And that is, “We know that one of the strongest predictors of future financial success is having a financial foundation to build from. Would you be interested in exploring strategies that could help create that foundation for your children or grandchildren?”

That way, the conversation becomes about the economic head start for the children.

And I think you want to get into the Trump Accounts, you want to get into the 529 plans. So it’s really an easier, gentler way to get into that conversation that I think will really resonate with your clients.

Q. How can advisors learn more about how IULs can help their clients?

A. When you're ready to take that next step and learn how IULs can help your clients, fill out the form below, and SMS will reach out to you.

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