Finding the perfect gift for the young children in your life can be overwhelming and difficult. You want something that’s meaningful. Something they will remember months, or even years, from now. Here’s an idea you may not have thought about: life insurance.
While it’s not a typical gift, buying a permanent life insurance policy on the life of a child can help establish a foundation for a lifetime of financial security. Let’s review some of the benefits of buying life insurance on children.
Protection. The policy you buy for a child today can still be there years from now, providing death benefit protection for this child’s own spouse or children.
Accumulation potential. A permanent life policy can build tax-deferred cash value over time that your loved one can access for things like:
- Funds to help with college expenses.
- A down payment for a new home.
- Money to start a new business venture.
- Supplemental income for the child’s own retirement decades from now.
Tax advantages. When accessed through policy loans and partial withdrawals, the life insurance policy’s cash value can be used with potentially no tax consequences. The policy death benefit is generally paid tax-free to beneficiaries upon the death of the insured.1
Low premiums. Premiums for life insurance on a child are often much lower than those for adults. With permanent life insurance, it’s possible to lock in the premium at the child’s current age—for life. Once the life insurance policy is issued, coverage cannot be canceled if the required premiums are paid.
Protecting insurability. These policies can be kept after a child becomes an adult — throughout his or her lifetime — regardless of health status.
There’s a chance a child could develop a chronic or terminal illness, such as diabetes, cancer or heart disease, especially if there’s a family history. This would cause a higher rating on life insurance, making it cost more. Purchasing life insurance for a child can lock in their insurability at a young age, ensuring they have coverage in place even if they develop health issues later in life that might make it more difficult or expensive to obtain coverage.
Added flexibility. There are many unexpected events besides death that can cripple a family’s finances in a hurry. That’s why living benefits riders are available on many life insurance policies. That means if your child is diagnosed with a chronic, critical or terminal illness, they can receive a part of the policy’s death benefit while they’re still living, giving them more options to deal with the financial strain of a future medical condition.
A planning strategy
This hypothetical example illustrates how purchasing life insurance as a gift to grandchildren helps you leave a legacy to support your loved ones’ financial responsibility and protection.
Mi Kim understood the value of life insurance. When her husband passed away from a heart condition when he was only 49, she was grateful for the life insurance they had in place. Her husband had run their family business and was their family’s primary bread winner. Without his life insurance, she didn’t know what she would have done. The life insurance death benefit gave her the money she needed to pay her husband’s hospital and doctor expenses, as well as his funeral costs. It gave her money to pay off their mortgage so she could keep their family home and still pay for their kids’ college education. It also gave her the funds to hire someone to manage the family business while she got her life back in order. She always encouraged her two children to make sure they had enough life insurance in place to protect their families in case anything tragic and unexpected happened to them.
Several years later, Mi wanted to provide a meaningful gift to her two grandchildren, Annie age 3 and Kevin age 1. She would still buy them toys and clothes to commemorate special occasions, but she also wanted to give them something special they would remember for the rest of their lives. She decided to buy them each a 10-pay whole life insurance policy. She liked the idea of protecting their insurability, in case their health changed as they grew up.
She also liked the idea of providing them with a financial safety net, knowing that the cash value of the policies could be used for a variety of reasons, such as college, their wedding or even their own retirement. After 10 years, the policy will be paid for, so she won’t be burdening her loved ones with future premium payments.
As Mi’s granddaughter, Annie, grew up, she didn’t understand the value of the life insurance her grandmother bought for her. She didn’t really need life insurance yet, but since it was paid for, she just filed it away and forgot about it.
After Annie gave birth to her first child, she began to see the importance of making sure her child was financially protected. However, when Annie was pregnant, she developed gestational diabetes. The disease developed into type 2 diabetes after she gave birth, making new life insurance policies much more expensive than before she was diagnosed with the disease.
She took another look at the whole life policy her grandmother had bought for her almost 30years prior. She was surprised to see that the death benefit was close to what she and her husband thought they needed. Thankfully, because of her grandmother’s thoughtfulness, she didn’t need to buy added coverage.
Money for the future
After hearing about Annie’s experience, Mi’s grandson, Kevin, was curious about the policy his grandmother had bought for him. He already had life insurance coverage through his job, but he and his wife were planning on buying their first home and he thought he might need to increase his coverage. This policy filled the gap. He was also surprised to see the cash value that had built up in his policy. He and his wife decided to take a policy loan on the cash value to cover the down payment on their house, preserving the money they had in savings. He was thankful his grandmother had the foresight to provide him with this extra financial security.
Ownership. When buying a life insurance policy for a child, it’s generally owned by the purchasing adult. When the child becomes a legal adult, ownership can be transferred to them.
Beneficiary. The beneficiary is the person or persons who would receive the death benefit of the policy. Generally, this is the child’s parent or guardian. When the child becomes the owner of the policy, he or she can name another beneficiary if they wish.
Premiums. There are a variety of ways to pay for life insurance on a child.
- 10-pay: You could decide the premium you’re willing to pay, or the death benefit amount you want and pay for a whole life insurance policy over 10 years. This shorter payment period, after which the policy will be paid-up for life, means your loved ones won’t be burdened with ongoing premium payments.
- Lump sum: Instead of giving a child a cash gift, you could use that sum, perhaps $10,000 and buy a life insurance policy for whatever death benefit amount that sum would buy.
- Ongoing premiums: You could also select the premium or death benefit wanted and make the scheduled premium payments.
You can also take advantage of the annual gift tax exclusion when buying life insurance for a child, since the life insurance premiums you would be paying are considered a gift to the child. The annual gift tax exclusion allows you to give a certain amount of money to another person each without incurring any gift taxes. By gifting assets during your lifetime, you can reduce the size of your taxable estate and any potential estate taxes that might be owed upon your death. You may want to consult your attorney or other tax professional for more information.
Underwriting. Medical and financial guidelines are a little different when a child is the insured. Generally, there are fewer medical requirements for insured’s up to age 17 and allowable coverage amounts are limited by the parent’s amount of insurance. Also note, one parent’s signature is needed when applying for coverage.
Ameritas can help
At Ameritas, we believe in fulfilling life. What could be more fulfilling than helping to provide financial security for your loved ones? Learn more about our life insurance offerings to see if one is right for your financial strategies.
Sources and References:
1Tax law permits a policy owner to withdraw life insurance policy cash values up to the policy owner’s basis or investment in the contract without income tax consequences. Loans and withdrawals will reduce the policy’s death benefit and cash value and may cause the policy to lapse. Withdrawals beyond basis may be taxable income. Excess and unpaid loans will reduce policy value and may cause the policy to lapse. If a policy lapses, unpaid loans are treated as distributions for tax purposes. For more information about the tax results of life insurance, consult your attorney or tax advisor.
Neither Ameritas Life Insurance Corp. nor its representatives provide tax or legal advice.
In approved states, life insurance is issued by Ameritas Life Insurance Corp. In New York, life insurance is issued by Ameritas Life Insurance Corp. of New York.
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