Grandchildren are some of life’s greatest gifts and, naturally, grandparents want to protect them and set them up for the future. Several companies promote gifting whole life insurance policies for grandchildren, but there are better ways to set up their financial future.
Learn why buying whole life insurance for kids rarely makes sense, and what grandparents looking for life insurance for their grandchildren can do instead.
Grandparents can buy life insurance for their grandchildren with the permission of the child’s parent or guardian.
The amount of coverage available for child life insurance policies depends on the face value of their parent or guardian’s policy.
Transferring ownership of an existing policy is financially complicated and should only be done with the guidance of a financial advisor or lawyer.
Buying life insurance for your grandchild
Life insurance is meant to serve as an income replacement for dependents after you’re gone and can sometimes be a useful retirement or estate planning tool while you’re alive. However, buying life insurance for children is generally unnecessary since no one relies on them financially.
There are rare cases in which purchasing child life insurance makes sense. If your grandchild has a serious or lifelong medical condition and might not be able to qualify for life insurance when they’re older, buying whole life insurance while they are younger and healthier can secure coverage for their entire life. But these types of permanent policies are costly and the money you’d put toward premiums throughout their childhood could be better invested in other products, like a 529 plan or investment account.
Whole life insurance for minors
Whole life insurance is one of the only types of life insurance available for minor children. Whole life is a permanent type of life insurance that lasts as long as the premiums are paid. It also includes a cash value and savings component, which makes it more expensive than comparable term policies for the same death benefit amount.
The high cost for whole life insurance might be worthwhile if you are a high net worth individual who can comfortably afford the premiums. However, since you’d be buying the policy for a young child, a lifetime of premiums (or premiums paid until they are old enough to take ownership of the policy at age 18-21) is expensive and rarely worth the cost.
Who can buy a life insurance policy for a child?
There are certain restrictions to buying life insurance for other people, including consent of the insured. But minor children cannot legally consent to a policy and, typically, parents and guardians are the ones purchasing child life policies. If you are a grandparent shopping for life insurance for your grandchild and are not their legal guardian, you’ll need the child’s parent or legal guardian to sign off on the policy.
Another roadblock to purchasing life insurance for a child: you (or the child’s parent) must have your own life insurance policy. Most insurance companies only extend up to 50 percent of the face value of their parent or guardian’s policy. The amount of life insurance a child is eligible for also depends on their age.
For example, if you’re interested in gifting a whole life policy to your grandchild and their parent has a $100,000 life insurance policy, you could only purchase a policy up to $50,000 for the child. Different insurers have different rules and restrictions, so it’s important to compare rates and shop around.
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How to transfer a life insurance policy to your grandchild
If you bought a life insurance policy insuring your grandchild who has reached the age of majority, you may want to transfer ownership of the policy to them. This process is fairly straightforward but depends on your specific insurer. By transferring ownership of the policy, the new owner (your grandchild in this example) would be required to pay the premiums going forward instead of you.
Gifting life insurance to a grandchild
Rather than purchasing a new life insurance policy for a child, some grandparents may opt to give ownership of a whole life policy insuring themselves to a grandchild. That means the grandchild would become both the policyowner and the beneficiary, but not the insured.
This type of life insurance policy transfer works the same as transferring a policy in which your grandchild is the insured party. However, we recommend consulting a financial advisor, tax expert, or insurance agent before doing this because it could incur gift and estate taxes.
Some important considerations when transferring ownership of life insurance:
Transferring policy ownership from yourself to a grandchild can sometimes remove the policy from your estate (if applicable) and avoid federal estate taxes.
The new owner of the policy must be an adult over the age of majority or a trust (such as an irrevocable life insurance trust).
The new owner can also be the named beneficiary.
You can gift the new owner money each year (up to a certain amount before being subject to federal gift taxes) to help cover the cost of the premiums.
Life insurance ownership transfer is typically irrevocable and you will no longer have the right to change beneficiaries.
If you die within three years of transferring ownership, the value of the life insurance policy would be clawed back into your estate. The policy may be subject to estate taxes.
Before making any changes to your life insurance policy, consult with a financial advisor or lawyer who can confirm whether the above considerations are true for your specific situation.
Alternatives options to life insurance for children
The premiums you would pay to fund whole life insurance for a child until they reach age 21 could accumulate to tens of thousands of dollars. Instead, you could put that money toward:
A 529 plan
A custodial account
A high yield savings account
Although whole life insurance for grandchildren comes with a cash value, putting your money toward a more aggressive investment account and naming your grandchild as the beneficiary can help support them financially when you’re no longer around.
Frequently asked questions
Can I get life insurance on my grandchild?
With parent or guardian consent, you can get a life insurance policy for your grandchild. However, life insurance policies for children don’t typically make sense.
Why would you buy life insurance for a child?
If your child or grandchild has a medical condition that would make it difficult or expensive for them to qualify for life insurance later in life, a whole life insurance policy secures them for the rest of their life if you can afford the costly premiums.
What is the best life insurance policy for a child?
Whole life insurance is one of the only options available for children. This type of life insurance is less risky than other types of permanent life insurance because it comes with a guaranteed death benefit and cash value. However, children rarely provide income, so we don’t recommend buying them a policy.