If you’re a new parent, you know that the first few years with a baby include constant concern for the countless needs of your little bundle of joy, both now and over the course of their lifetime. One of the most common concerns for parents is the cost of college and how to handle unexpected expenses along the way. It is very easy to put off planning for college funding and emergencies when you have so many others things to navigate like childcare, breastfeeding versus formula, selecting a pediatrician…the list goes on. Don’t let college planning be pushed off too far into the future; you might just lose the biggest tool you have for college planning for your child: compound interest. Not only can you plan for college by starting early, but also with the right tools in place, you would be able to offer your child money for college, money for a wedding or first home, as well as a personal pension at retirement with over $1,000,000 lump sum to leverage for drawing income. Oh, and did I mention this would all be done on a tax advantaged basis? This strategy has been called Million Dollar Baby.
The Million Dollar Baby principle uses life insurance as the primary tool. If you haven’t learned about life insurance as a savings tool, you can do a little reading on the topic here but, in short, life insurance allows you to grow after-tax money, on a tax-deferred basis, and can be accessed tax-free through use of policy loans. Ownership in these plans have the option to be passed over to your child after they turn 18. By the time your child is out of college, the plan is fully funded and will continue to earn interest for the rest of their lives.
Here is a basic example of how the Million Dollar Baby principle can be executed. (It is important to note that this is affected by current rates, and they can vary.) If you contribute $250/month to the plan beginning before age one, you would pay in for approximately 20 years and then stop. If we use 6.5% interest (which is the current dividend scale of a large international insurance company), by the time your child is of college age, there would be over $80,000 in available tax advantaged savings. At age 35, you would have almost $200,000 available for a wedding, first home, or other expense. At age 45, near the age when the average American would be tempted or forced to draw from their 401k or IRA, you would have about $350,000 in savings. By retirement at age 65, they would have over $1,000,000 in savings. These funds can be drawn off of at any point during the life of the contract. An additional advantage of these plans is that when you take a loan, you are taking a loan from yourself and paying yourself the interest.
Life insurance has many uses for all kinds of people, from the average, middle-class American to the wealthy business owner. The Million Dollar Baby principle is one technique that utilizes life insurance as the main vehicle to plan for your family’s financial future. It is important to remember that life insurance can take many forms and be applied to varying strategies for financial management. Always work with a professional when navigating insurance choices.
Million Dollar Baby is a great way for us, as parents, to achieve the goal most all of us have for raising our kids—to give them a better life than we had by providing them what tools and advantages we can. This plan is definitely not right for everyone and the numbers can vary, but the Million Dollar Baby principle is a great demonstration of the power of life insurance when used properly.