Why saving one million bucks for your children is a bad idea
Key takeaways
A counsellor’s job is to present alternative ideas that can achieve the same level of success at a lower cost.
If you want to leave an inheritance to your children, saving a pile of cash is not the most affordable way to do it.
Do the math, and you’ll see that permanent life insurance offers a lower-cost, guaranteed way to leave an inheritance.
Let’s say you want to save money and leave a $1-Million inheritance to your kids. And you want to achieve your goal over the next 30 years.
It’s doable. But it relies on some pretty big assumptions, like:
You’ll be able to invest about $2,000 in after-tax income every month for the next 30 years – that’s about $720,000
You maintain your income for 30 years
You average 6 per cent return on your investments
You live for another 30 years
The market doesn’t tank in year 29
You can access the cash without paying tax
Let’s unpack each of these risk factors and compare them to what happens when you buy a permanent life insurance policy with a guaranteed, tax-free death benefit of $1-Million.
Risk #1: Your ability to save $720,000 in after-tax income
Saving $1-Million
You’ll need to invest about $720,000 in after-tax income to leave $1-Million in cash to your heirs.
Permanent Life Insurance
After 20 years, the total deposits to a policy will be about $280,000 and you’ll never have to make additional payments.
Risk #2. Your income is never interrupted
Saving $1-Million
Any interruption in your income can derail this plan immediately. You may even need to dip into your savings to support your lifestyle.
Permanent Life Insurance
Once the policy is paid in full, payments stop. In some cases, you can pay the lion’s share up front to avoid a long-term commitment.
Risk #3. You need to average a 6 per cent annual rate of return
Saving $1-Million
Earnings are difficult to predict over a 30-year time horizon. Alternative investments, that are not so tied to the emotions of the market are a little more predictable but why gamble with your children’s inheritance?
Permanent Life Insurance
Permanent life insurance will pay the tax-free amount regardless of the markets ups and downs or interest rates. In this case, the $1-Million is guaranteed.
Risk #4. You don’t live for another 30 years
Saving $1-Million
If you die just five or 10 years into your savings plan, the kids get nowhere near $1-Million. You haven’t had enough time to make the full investment and benefit from compounding interest.
Permanent Life Insurance
Your kids get $1-Million whether you die a month, a decade, or 40 years after you bought the policy. The death benefit is guaranteed from Day-1.
Risk #5. The market tanks in the final year
Saving $1-Million
Obviously, the 30-year time horizon was just a goal. You can stay invested for longer if you are alive. But a single market correction could seriously erode your savings, wiping out years of financial gains.
Permanent Life Insurance
Permanent life insurance isn’t tied to the stock market or interest rates. In fact, inheriting money when the market is down could be a huge buying opportunity for the kids (after they pay up their own permanent life insurance policy, of course).
Risk #6. Liquidity
Saving $1-Million
No matter where you’ve invested your money, there will be a cost to withdraw it if you need emergency funds. Only a TFSA would allow tax-free withdrawals but the amount you can put into one is capped.
Permanent Life Insurance
Permanent life insurance policies include a cash portion that increases over time. This is a contingency fund that you can access tax-free in a variety of ways. In the case of an emergency, you can take what you need and not jeopardize the size of your children’s inheritance.
The big wrap up
A financial plan is an evolving combination of strategies that work together so that you achieve your goals most effectively. When one of your goals is to leave your children a healthy inheritance, permanent life insurance is one of the easiest, tax-efficient, and most affordable ways to do it. Of course, you can leave your kids more money, and possibly the family home, but to truly manage risk, insurance is essential. |
We can set clients up with affordable life insurance by simply adjusting their current financial plan. This means you can lower your risk and build more resilient wealth, spending no more money than you do today. Our process identifies ways to save money and redirect it toward the most important goals. Let us show you how it works. Call 905-361-2026 to book an appointment or email david@dcwealth.ca.
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