Grandchildren are some of life’s greatest gifts, so, naturally, grandparents want to protect them and set them up for the future. Several companies promote whole life insurance policies for children, but there are better ways to set up your grandchild’s financial future.
Learn why 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 the parent or guardian’s policy.
Children do not provide income, so insuring a child’s life is hardly ever justified.
Life insurance is meant to serve as an income replacement for dependentsafter 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 could be better invested in other products, like a 529 plan.
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.
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 buying a whole life policy for 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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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.
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 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 and can also be the named beneficiary.
The new owner is responsible for paying all premiums.
You can gift the new owner money each year (up to a certain amount before 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 life insurance policy is subject to federal estate taxes.
If the cash value of the policy exceeds the gift tax limit ($15,000 in 2021), the new owner will be required to pay taxes when you die.
The premiums you would pay to fund a 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 college savings plan, a high yield savings account, bonds, stocks, trust, real estate, or other investment accounts.
Although whole life insurance 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.
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.
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.
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.