Several companies promote gifting whole life insurance policies for grandchildren as a way to set them up for financial success. Whole life insurance is a type of permanent life insurance policy that never expires and comes with a cash value component, which can act as an investment vehicle.
Although whole life insurance policies for children are available, there are more effective ways to invest in your children’s and grandchildren’s future.
When should you buy life insurance for your grandchild?
Life insurance is meant to provide a financial safety net for your loved ones after you’re gone, especially if you have people who depend on your income. It can be a useful estate planning tool as well.
Buying life insurance for children is often unnecessary since no one relies on them financially. But there are rare cases in which purchasing child life insurance makes sense.
If your grandchild has a serious medical condition and might not be able to qualify for life insurance when they’re older, buying whole life insurance while they’re younger 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.
→ Learn more about buying whole life insurance for children
Whole life insurance for minors
Whole life insurance is one of the only types of life insurance available for minors. Whole life is a type of permanent life insurance that doesn’t expire and includes a cash value savings component.
The high cost of whole life insurance might be worthwhile if you’re 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’re old enough to take ownership of the policy as an adult) is expensive and rarely worth the cost.
Can you buy term life insurance for minors?
No, term life insurance isn’t available to people under the age of 18 because it’s often meant to provide a financial safety net in case of death. Since children aren’t typically financial providers for their family, you can’t buy a term life insurance policy for them.
Who can buy a life insurance policy for a child?
Typically, parents and guardians are the ones purchasing child life policies.
If you’re a grandparent buying life insurance for your grandchild and you aren’t their legal guardian, you’ll need the child’s parent or legal guardian to sign off on the policy.
In order to purchase life insurance for a minor, you (or the child’s parent) must also have your own life insurance policy. Most insurance companies will offer up to 50% of the coverage amount of their parent or guardian’s policy.
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 life insurance quotes and shop around.
Gifting life insurance to a grandchild
Rather than purchasing a new life insurance policy for a child, some grandparents may opt to buy whole life insurance for themselves and name their grandchildren as both the beneficiary and policyholder on the policy.
You, as the grandparent, would still be the one insured by the policy — but your grandchild would receive the life insurance payout when you pass away.
If you want to transfer ownership of an existing whole life insurance policy to your grandchildren, you need to contact your insurance company and fill out the required paperwork.
However, we recommend consulting a financial advisor or tax expert, as well as an insurance agent before doing this because it could incur gift and estate taxes.
Some important considerations when transferring ownership of life insurance include:
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 a legal adult or a trust (such as an irrevocable life insurance trust).
The new policy owner can also be the named beneficiary.
You can gift the new policy 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 — meaning you can’t reverse the process — and you’ll 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 included in 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 any of the above considerations apply to your specific situation.
How to transfer a life insurance policy to your grandchild
If you bought a life insurance policy insuring your grandchild and they’re now a legal adult, you may want to transfer ownership of the policy to them.
This process is fairly straightforward but depends on your specific insurer.
You’ll need to contact your insurance company first. If you purchased your policy through Policygenius, our team of experts can assist you.
Then, you’ll typically fill out paperwork indicating the details of the transfer.
By transferring ownership of the policy, the new owner (your grandchild in this case) would be required to pay the premiums going forward instead of you.
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
An IRA
A custodial account
A high yield savings account
Bonds
Stocks
Trusts
Real estate
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.
