A common question in the life insurance industry is, “My parents took a life insurance policy out on me as a kid, what now? Is it mine?”
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.
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.
Table of Contents
- Is the Policy My Parent Bought On Me Mine?
- What You Need to Know About Policy Ownership
- Why You Need Your Own Life Insurance Policy
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.
Why Buy Life Insurance on a Child?
There are many reasons why parents and grandparents 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.
What You Need to Know About Policy Ownership
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 legal obligation to transfer ownership or ensure the adult child benefits from the policy, even if it’s requested. As owners, they have complete control of the policy during your (the insured’s) lifetime.
What does this mean in practice? Some examples of their options include:
- Terminating the policy in exchange for its surrender value
- Selling it for cash
- Gifting it
- Transferring ownership
- Change beneficiaries
- Accessing the cash value and using it however they wish
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. We don’t recommend this course of action.
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.
Potential issues to be aware of:
- When three different people are named as owner, insured, and beneficiary, this creates a tax issue.
- When the insured dies, the owner receives the death benefit tax-free (that applies to all named beneficiaries)
- If they choose to gift the death benefit to your spouse, they’re on the hook for taxes
To avoid all of the issues mentioned above, transferring ownership to you (the insured) is the best course of action.
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 you have any concerns about policy taken out on you as a child, talk to your parent/grandparent about it. If you’re truly concerned someone is taking advantage of a policy on you, 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. 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.
If your death would have a negative financial impact on a loved one, you need your own life insurance.
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.
Unsure how much life insurance coverage you need? Our easy-to-use needs calculator can help.
» Calculate: Life insurance needs calculator
Ready to see instant quotes? No need to give away any contact information to see quotes in real time. Play around with it to find a price point you’re comfortable with, then you can apply online in just a few minutes. Easy peasy.
» Compare: Term life insurance quotes