Children’s Whole Life Insurance is a commonly purchased life insurance product. Parents and grandparents can buy these policies on their minor children and grandchildren.
There are many reasons why parents and grandparents may choose to buy a child’s whole life insurance policy. Some benefits of buying children’s whole life insurance include:
- Locking in a low premium
- Guaranteeing life insurance coverage for the child no matter what health issues may occur
- Option to purchase more coverage later in the child’s life
- Accumulating cash value that grows with the child
These policies typically don’t have large face amounts. They often range from $5,000 to $50,000 in coverage, but if the worst should happen and a child dies far too young, the death benefit can help the parent pay for a funeral and other expenses.
In most cases, thankfully, children grow into healthy adults and proceed to live long lives. But this doesn’t mean the policy now has no purpose. Children’s whole life insurance is a permanent product which means it will provide coverage until the insured dies, no matter when that is, as long as the premiums keep getting paid.
We get the following question from many of these insured children who have now grown up:
Is the policy my parent bought on me when I was young now mine?
The simple answer is no. Although there are a few companies that offer products that do become the child’s asset at age 21, most policies bought on children do not automatically transfer ownership.
These policies are owned by the parent/grandparent. Policyowners have control over the policy. Although the child may be the person who is insured, the child does not have legal rights to the policy, even as adults.
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Parent Owners Can Transfer Ownership (if they want to)
Policyowners can transfer ownership to the adult child if they choose to do so. In fact, this is a popular decision. When the adult child grows up and has a family of their own, this small whole life insurance policy purchased on them when they were young has accumulated cash value. These funds can be accessed through policy loans and withdrawal or surrenders.
But parent/grandparent policyowners are under no obligation to transfer ownership, even if the adult child requests it. As owners, they have unrestricted access to the cash value and can use it however they wish. The parent or grandparent sometimes will simply opt to surrender (terminate) the policy and receive the surrender value in cash.
If your parent or grandparent owns a policy on you and you prefer to be the owner, you can offer to buy it from them. Offer what the policy is worth in exchange for transferring ownership. But, again, they aren’t required to accept the offer.
Parent Owners Can Change Beneficiaries (if they want to)
In lieu of transferring ownership, some parent/grandparent owners may also choose to just change the beneficiary. But we don’t recommend this course of action. Here’s why.
The typical scenario: If a parent/grandparent buys a life insurance policy on their minor child, they are likely the beneficiary as well. When this child grows up and has a family of their own, some parent owners may choose to change the beneficiary to the child’s spouse as a gesture of love. With this setup, they still own and have control over the policy. They still pay the premiums. If they want to access the cash value account, they can, but the death benefit goes to the child’s spouse when the child dies.
The problem with this scenario: when a life insurance policy has three different people named as owner, insured, and beneficiary, this creates a tax issue. When the insured dies, the owner is essentially gifting the death benefit proceeds to the beneficiary. In normal circumstances, a death benefit is paid tax-free, but not when it’s a gift in the eyes of the government.
If a parent wants the child’s family to receive the death benefit, it’s best to just transfer ownership to avoid the death benefit becoming taxable.
In conclusion, children whole life insurance policies are purchased out of love and protection. There is no reason to feel uneasy, but open a dialogue with your parent/grandparent if you’re concerned about this policy on you.
If discussing with them isn’t an option and you’re truly troubled that someone else has a policy on you that you don’t have control over, contact your local insurance commissioner for assistance. You can find contact information for the commissioner’s office in the state you live in here: NAIC.org.
Why You Need Your Own Life Insurance Policy
You’re an adult now. You have financial obligations and responsibilities that no one else is going to take care of. If you have a family, people who would be impacted financially if you died, then you need to get your own life insurance policy.
Don’t rely on the small whole life insurance policy your parents may have purchased on you when you were young. Even if ownership does transfer to you, this amount is likely not enough to replace the income you provide to your family.
You also should not rely on any life insurance you may have through your employer. Group life insurance does not follow you if you leave your job. It’s also a limited amount, typically 1-2 times your income. If you die unexpectedly, how many months until your family begins to struggle to pay bills without your paycheck?
Term life insurance is very affordable. And buying your own policy means it follows you no matter where you live or work. You’re in control. You choose how much coverage to buy and how long the coverage will last.
Term lengths range from 10-40 years, and once you buy the policy, you lock in your rate for that entire term. So, if you buy a 30-year term policy for $30 per month, the rate will never increase even as you age or even if you develop a serious health condition.
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