Helping to set your grandchildren up for a successful future is a great gift. One way of doing this is with a whole life insurance policy.
Features of whole life insurance include:
- Coverage that lasts the entire life of the insured
- Cash value accumulation
- Cash can be accessed via policy loans or withdrawals
- Loans do not have to be paid back but amount plus interest will be taken from death benefit before paid to beneficiaries or surrendered
- If loan balance and interest ever exceeds cash value amount the policy will terminate
- Possible dividend earnings
Note: You cannot buy term life insurance on a minor child. It would terminate before or in the middle of their peak earning years thus rendering the policy mostly pointless. In addition, the cost for the insurance company to underwrite and service the term policy would not make sense financially since the premiums would cost so little.
Buying a whole life insurance policy on your grandchild can be one way to leave a unique gift that instills the importance of protecting who matters most.
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Life Insurance for Grandchildren
Not all relatives can simply buy life insurance on another relative. But grandparents buying life insurance on grandchildren is more commonly accepted. There are certain requirements that need to be met, however. For example, if there are siblings, the grandparents need to purchase life insurance on all the grandchildren. They are not allowed to buy on just one unless they have a reason that is accepted by the insurance company. Also, if the child’s parents are still living, the parents need to be insured for at least the same amount of coverage that the grandparent wants to buy on the grandchild.
When buying whole life insurance on your grandchild, you would be the policyowner and your grandchild would be the insured. As the policyowner, you pay the premiums for the policy on your grandchild. You also have control of the policy and all the rights that go along with policy ownership.
As the child grows, the cash value inside the permanent policy grows. Years later, you can withdraw these funds and use it to help your grandchildren with college tuition or perhaps help pay for a wedding. Anything you want to use it for. Alternatively, you can transfer the policy to your grandchild when he or she becomes a legal adult. As owner of the policy, you have complete control and are not required to transfer the policy.
A whole life insurance policy purchased on your grandchild can be beneficial for both the child and for you.
Benefits for the Grandchild
As children grow older, they may develop a serious health condition or take up a love of extreme sports, causing them to disqualify for or not afford life insurance. Purchasing whole life insurance for a child now will help ensure they have guaranteed protection for life.
As mentioned earlier, when the child is an adult, you can transfer policy ownership to the child. The child takes over and can make changes as needed; changing the beneficiary from you, the grandparent, to their own spouse, for example.
The policy can be designed so your grandchild never has to pay premiums. There are single-pay and 10- and 20-year payment period options which can guarantee the policies will not require additional funding once the children become adults.
When the children are grown, they may want more coverage to protect their own families. For an additional cost, some whole life policies offer the option for the insured (your grandchild) to purchase coverage at certain life events (marriage, adoption, or birth of a child) or at regular intervals, regardless of their health at the time. In general, however, if your grandchild is still insurable, he or she buying an additional term life insurance policy instead may be more appropriate in this situation.
As owners of the whole life policy, the adult child would also have access to the policy’s cash value. This cash value can be accessed by taking out policy loans against it, making withdrawals, or surrendering the policy. Your grandchild can use the cash any way they wish. It’s often used for:
- College tuition and expenses
- Funding a wedding
- A down payment on a house
- Starting a business
A participating whole life policy also has the potential to earn dividends, which could be used to provide additional life insurance protection and cash value. Or the grandchild can opt to take the dividends as cash. These dividends are not guaranteed, however.
Benefits for the Grandparent
For you, the grandparent, buying a whole life insurance policy on your grandchild can be one way to leave a unique gift that instills the importance of protecting who matters most. Unlike most gifts, a whole life insurance policy can grow in value.
It also enables you to help financially if the worst should happen and your grandchild dies. The death benefit can be used to help with a memorial and funeral.
As owner of the policy, you have the option to access the cash value if you wish. If it’s a participating whole life insurance policy, you can also opt to take earned dividends as cash, reduce premium payments, or leave it in the policy to increase the death benefit. But not touching either the cash value or dividends allows the policy to grow more rapidly and not run the risk of termination.
Premiums are based on the age and health of the insured. Because the insured is a young child, premiums for the whole life insurance policy can be quite reasonable.
Rose buys a participating whole life insurance policy on her 10 year old grandson, Pat. Rose is both the policyowner and the beneficiary.
She plans on eventually gifting the policy to Pat in the future and doesn’t want him to worry about being responsible for the premiums. She decides to buy a 10-pay whole life insurance policy. This means it’s designed to be completely paid up in ten years.
The face amount of the policy is $116,279. The annual premiums Rose will pay every year for ten years is $1,500.
The cash value of a whole life insurance policy grows at a guaranteed rate set by the insurance company and is not tied to market-driven investments. If the stock market plummets, the whole life policy will not be affected. In addition, the value of a whole life insurance policy has the potential to grow even more based on dividends.
The table below shows an example of the guaranteed values of Rose’s whole life policy on Pat. These values have the potential to be higher based on dividends which are dependent on the insurance company’s investment returns, claims experience, and expenses.
|The following table and chart summarizes the policy's guaranteed premiums, cash value, and death benefit. These values assume that no dividends are paid.|
|Age 38||Age 65||Age 71||Age 77|
|Cumulative Contract Premium||$15,000||$15,000||$15,000||$15,000|
|Guaranteed Cash Value||$24,487||$58,001||$68,522||$79,383|
|Guaranteed Death Benefit||$116,279||$116,279||$116,279||$116,279|
|Guaranteed Paid-Up Insurance||$116,279||$116,279||$116,279||$116,279|
Rose will transfer ownership of the policy over to Pat when she feels he is financially responsible. When this time comes, the cash value account and death benefit would have had the opportunity to grow especially if Rose did not make any withdrawals, take dividends as cash, or borrow against the policy.
The table above shows how the cash value could be of use to Pat at certain stages of his life. Perhaps at age 38 he needs funds to start a business. Or maybe at 65 when he retires he would like to surrender the policy to supplement his retirement income. Or maybe Pat lets it sit and grow to be available for medical or final expenses for him or his spouse, if needed, and the death benefit can be a financial legacy to pass down to his loved ones.
Gifting the Life Insurance Policy to the Grandchild
Once your grandchild is an adult, you have the option to transfer ownership over to him or her. Your grandchild can choose to keep the policy active or surrender the policy and walk away with the cash value.
If you plan on transferring ownership to your grandchild, it’s best to leave the policy alone to let it grow. Another reason to not touch it is because transferring the policy can get complicated if the policy is subject to a loan.
Gifting life insurance can have tax consequences if you have a large estate. For most people, the value of the life insurance policy won’t trigger a gift tax at your death because it’s likely less than your lifetime exemption amount (currently $11.58 million per individual in the year 2020). However, we recommend you talk with an estate planning attorney if you’re planning on gifting life insurance.
Other Ways to Financially Support Your Grandchildren
Buying a whole life insurance policy on your grandchild isn’t always the best option depending on your goals and financial situation. Here are other options to consider:
- Open a college fund for your grandchild.
There are two types of college funds: a 529 plan and an ESA (Education Savings Account). These both can affect the amount of financial aid your grandchild qualifies for and may have tax consequences so be sure to speak with an investment advisor first.
- Open an IRA for your grandchild.
An IRA is a great way to set your grandchild up for a financially strong adulthood. An IRA can be contributed to a little at a time slowly growing to a large amount as your grandchild grows. Typically, if you withdraw from your IRA before you are 59½ years old, you will owe a 10% additional tax on the early distribution. However, funds can be withdrawn from a traditional or Roth IRA before reaching age 59½ without paying the 10% additional tax if used to pay for qualified higher education expenses in the year the withdrawal is made. Once again, contact an investment advisor first because of tax and financial aid complications.
- Open a custodial account for your grandchild.
These custodial accounts are called Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, depending on the state. Think of them as savings and investing accounts that your grandchildren can’t touch until they become legal adults. Just as with the other savings options, speak with an investment advisor first. These custodial accounts can affect your grandchild’s financial aid and may have gift and income tax implications.
This article is for educational purposes only and not legal advice. If you’re interested in whole life insurance for your grandchild, contact Quotacy to discuss your best options.
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