As a grandparent, the desire to see your grandchildren thrive and succeed is a powerful motivator. You’ve watched them take their first steps, say their first words, and grow into unique individuals with dreams and aspirations of their own. Now, you are contemplating how you can contribute to their future financial wellness in a meaningful way. The answer may lie in a gift that keeps on giving – the Million Dollar Baby strategy.
A GIFT FOR EVERY MILESTONE
Imagine a financial gift that adapts to your grandchild’s life stages – from education to major life events, from retirement planning to estate considerations. This isn’t just any gift; it’s a tax-efficient, life-long financial asset that grows alongside them.
THE CORNERSTONE OF THE STRATEGY: AN ANNUITY AND A WHOLE LIFE INSURANCE POLICY
At the heart of this strategy is a term certain annuity paired with a flexible permanent whole life insurance policy. This combination is not just about leaving a legacy, it’s about building a financial foundation that supports your grandchild through every chapter of their life.
WHY IT’S EXCEPTIONAL
• Guaranteed Funding: The annuity ensures that the life insurance premiums are paid in a tax-efficient manner, providing peace of mind and financial security.
• Tax Efficiency: The whole life insurance policy enjoys preferential treatment under the income tax act, allowing the cash value to accumulate without annual taxation.
• Growth: A portion of the cash value is used to purchase additional life insurance each year, ensuring the policy’s value continues to increase, even when contributions cease.
• Access: The accumulated cash value in the policy can be accessed in a number of tax-efficient ways.
CASE STUDY: ROGER AND TINA’S LEGACY FOR NICHOLAS
Roger and Tina, both 65, are the proud grandparents of 2 year-old Nicholas. They’ve chosen the Million Dollar Baby strategy to secure Nicholas’s financial future. They understand the nuances of tax efficiency and have structured their gift to maximize its benefits. Here’s how they’ve implemented the plan:
1. Annuity Purchase: With a single deposit of approximately $85,000, they secure a 20-year term certain annuity.
2. Annuity Income: Annually, they receive $6,000 in annuity income, guaranteed for 20 years.
3. Taxable Portion: Of this annuity income, only 30% is subject to taxation each year, significantly reducing the tax burden.
4. Life Insurance Premiums: The $6,000 annual premiums for the whole life insurance policy is seamlessly covered by the annuity income.
5. Policy Maturity: After the 20th year, the annuity payments conclude, and the life insurance policy becomes fully paid-up.
THE OUTCOME FOR NICHOLAS
As Nicholas grows, the policy’s accumulated tax-efficient cash value becomes a reservoir he can draw from, tax-efficiently, for various life events:
• Education at age 18: A projected cash value account of $100,000 can be accessed to fund his post secondary journey.
• First Home Purchase at age 35: When he wants make a down payment on a home the projected cash value account has grown to approximately $330,000.
• Retirement at age 70: As he looks towards retirement, the policy’s cash value account has grown to more than $2,300,000 and can be accessed to provide tax-efficient retirement income.
• Estate Planning at age 100: In his golden years, Nicholas could have an estate value in excess of $9,000,000.
ADDITIONAL BENEFITS
Incorporating the Million Dollar Baby strategy into your grandchild’s life offers more than just financial security; it provides a valuable educational opportunity. By engaging with this strategy, grandparents can instill in their grandchildren essential life skills related to financial literacy and responsibility. Here’s how the strategy can be a teaching tool:
Financial Respect and Responsibility
The Million Dollar Baby strategy can be a practical framework for teaching your grandchild the value of money. It demonstrates the importance of long-term planning and the benefits of saving and investing early. As they watch their policy’s cash value grow, they learn to appreciate the power of compound interest and the rewards of patience and discipline.
Navigating Loans and Credit
As the policy allows for tax-efficient loans against the cash value, it presents a controlled environment for your grandchild to learn about borrowing. They can understand the implications of taking out loans, the responsibility of repayment, and the impact of interest rates. This hands-on experience can teach them prudent borrowing habits and the significance of creditworthiness.
Stewardship of Wealth
The Million Dollar Baby strategy can also serve as a foundation for teaching wealth stewardship. Grandchildren can learn how to manage and preserve wealth over time, making informed decisions that align with their long-term financial goals. They can be guided on how to use their financial resources for meaningful purposes, such as education, home ownership, and retirement planning, while also understanding the importance of philanthropy and giving back to the community.
Practical Application
To put these lessons into practice, grandparents can involve their grandchildren in discussions about the policy as they grow older. They can review annual statements together, discuss the performance of the policy, and make decisions about any loans or withdrawals. This involvement can help grandchildren develop a sense of ownership and responsibility towards their financial future.
CONCLUSION
The Million Dollar Baby strategy is more than a financial gift; it’s a comprehensive educational tool that can help shape a grandchild’s financial expertise and ethics. It teaches them to respect money, navigate financial tools wisely, and become responsible stewards of wealth. By integrating these lessons into the strategy, grandparents can ensure that their financial gift has a lasting and profound impact on their grandchild’s life and beyond for future generations.
This article is a conceptual overview and should not be taken as financial advice. The annuity income and insurance values are not guaranteed; they will vary depending on many factors. For personalized guidance, please consult with Steve Cropo or Klint Rodgers. The figures and strategy discussed are subject to change based on individual circumstances and tax laws.
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