The Benefits of Life Insurance for a Child

There are valid reasons why a parent or grandparent may want to buy life insurance for a child, such as to start building financial resources or to ensure coverage as an adult. Approaching existing clients with young children or grandchildren is a good place to start when looking for prospects in this market. They already understand the value life insurance provides and will likely see the benefits for the children in their lives as well. Simply identify problems they’ve had which they don’t want their loved one to have when they grow up. Maybe it’s problems with insurability or providing a financial safety net now and in the future.

The benefit of protecting insurability

If there’s a history of chronic or terminal illness in a client’s family, protecting insurability into adulthood is a definite need, not a want. These policies can be maintained after a child becomes an adult — throughout his or her lifetime — regardless of health status.

Consider these facts:

• According to The Diabetes Research Institute, 3% of Americans have diabetes.
• Approximately 5% will be diagnosed with cancer at some point during their lifetime, according to The National Cancer Institute.
• The American Heart Association states that nearly half of all U.S. adults have some type of cardiovascular disease.

These health concerns could all 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.

Additionally, premiums for child life insurance policies are often lower compared to policies for adults. This can make it a relatively affordable way to start building a foundation of financial security.

The benefit of cash value

Buying permanent life insurance for a child allows more time for the cash value to grow, which they can access later in life for a variety of reasons¹, such as:

• Education.
• Purchasing a home.
• A wedding.
• Paying off accumulated debt.
• Living expenses.
• Retirement.
• Health expenses.

Sharing the illustration

When illustrating the policy for your client, you can show them how they can provide this needed future protection for their loved one and that it will be at a much lower cost than if their loved one waited until they’re an adult. Simply compare the premium they’ll pay now for protection that the child will need when they’re 30 with what a current 30-year-old would pay for the same coverage. Consider a policy with a relatively shorter payment period, after which the policy will be paid-up for life. This way, your clients won’t be burdening their loved ones with ongoing premium payments.

Life insurance policies for children typically are whole life insurance policies. They can provide lifelong coverage as long as premiums are paid. Premiums are guaranteed², so they won’t increase over time.

Ameritas Growth 10-Pay Whole Life works well for children’s insurance as it offers a short-pay option with focus on long term cash accumulation.

Find our more about Growth Whole Life 10-Pay.

Policy ownership

In most states, minor children are often restricted from owning a life insurance policy. There are generally four options for ownership:

The parent or grandparent can be the owner, in which case they can wait as long as they want before ownership is ever transferred to the child. However, the future policy transfer will be a taxable gift for federal gift tax purposes when made. If the policy value exceeds the gift tax annual exclusion amount, the use of the lifetime gift exemption will be required, or a gift tax may be owed.

A custodianship for the child under the Uniform Transfers to Minors Act (UTMA) creates a simple, statutory custodianship arrangement that provides a method to make gifts to a minor child without requiring the expense of creating a trust. If the premium payments do not exceed the annual gift tax exclusion, there will not be any taxable gifts during either the funding or at the termination of the UTMA arrangement.

A Minor’s Trust, (also known as a 2503(c) Trust) is a relatively simple to establish irrevocable trust that is created to be the owner and beneficiary of the policy. Gifts to the trust will qualify for the annual exclusion and the trust can be continued beyond the age of 21. However, the child has the right to terminate the trust and receive trust assets outright at age 21.

A properly structured Irrevocable Life Insurance Trust (ILIT) allows the parent or grandparent to make gifts of cash or other assets to the trust. The trustee will use the annual cash gifts or income from trust-owned assets to pay the annual life insurance premiums on the trust-owned policy. For a gift to an irrevocable trust (other than a Minor’s Trust) to qualify for the annual gift tax exclusion, the beneficiaries of the trust must be given a right to withdraw the gift that was made on their behalf. When the child is a minor, the withdrawal right and notice of such right is given to the child’s parents or legal guardians on his or her behalf.

Underwriting

Follow these underwriting guidelines when applying for juvenile coverage with Ameritas:

• Amounts applied for should be for a similar face or premium amount on all children in the same family.
• Guideline maximum coverage is 50% of the total in force on the parent who has the highest amount of coverage.
• Absolute maximum is $2 million.
• Exam and HOS requirements may be waived upon receipt of APS documenting comprehensive annual exams on juveniles 14 years old and younger.
• For any amount of coverage, the signature of one of the parents is required to verify the medical history and to acknowledge that insurance is being applied for on their child.

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. Withdrawals and loans will reduce the available death benefit. 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.

²Guarantees are based on the claims-paying ability of the issuing company.

In approved states, Ameritas Growth Whole Life (form 3018) is issued by Ameritas Life Insurance Corp. In New York, Ameritas Growth Whole Life (form 5018) is issued by Ameritas Life Insurance Corp. of New York. Policy and riders may vary and may not be available in all states.