We rarely think about participating whole life insurance when we think about gifts. It’s also unlikely that we consider buying life insurance for children. But, maybe it’s time to reconsider both notions.
Whether you want to give them a financial head start or teach them the value of protecting their family and financial future, here are three reasons why whole life insurance may be the perfect gift for your child or grandchild.
While children are young, life insurance costs are lower
Life insurance premiums are based on a number of factors, including a person’s age and health. Premiums are generally lower for children because they are young and healthy. As your children grow older, or if their health statuses change, they may not be able to qualify for or afford life insurance. Purchasing whole life insurance for a child now will help ensure that he or she has guaranteed protection for life.
Depending on the options you select, the policy may allow the child to purchase more protection (for an additional cost) when they reach certain ages. The increases are available at specific intervals or life events, such as marriage or the birth of a child. Policies also have the potential to earn dividends, which could be used to increase life insurance protection and cash value over time. Dividends are not guaranteed. (Related: What goes into whole life insurance dividends?)
Provide funds for their future
Whole life insurance policies have cash value that grows over time and can be accessed by the policyowner. As adults, your children or grandchildren could use some of that money to help pay some of their college tuition, fund a wedding or even as part of a down payment on a house. (Life Insurance Calculator)
What they’ll be able to use their whole life insurance policy for will vary depending on the size and type of policy you buy for them. Also, it’s important to understand that any distributions will reduce the policy’s cash value and death benefit and increases the chance it will lapse. If the policy lapses with an outstanding loan in excess of its cost basis, it’s taxable.
Some whole life insurance policies have various premium payment durations, allowing you to pay them off in as little as 10, 12, 15, or 20 years. There are even programs available that enable you to make a single lump sum payment to pay for one or multiple policies — a great idea for grandparents! That way when the kids are responsible enough to become the owner, they won’t have any premiums to pay. (Learn more: Laddering insurance policies)
Indeed, as mentioned earlier, since participating whole life insurance policyowners are eligible to receive dividends, they could have money coming to them. Whole life insurance policy owners can elect to receive dividends in cash or choose other options such as paid-up additional life insurance. While these dividend payments are not guaranteed, they remain an attractive possibility. (By the way, MassMutual has paid dividends to eligible participating policyowners every year since 1869.)
Life insurance for children: Practical and thoughtful
A life insurance policy may seem like a very practical gift … and it is. But, it can also be a sentimental gesture to show your children or grandchildren how much you care about their future.
Think about 20 years from now when it’s time for your child or grandchild to take ownership of the policy. She could read a personal letter you included with the policy that explains how much she means to you and the important reasons why you bought the policy for her. Perhaps include a favorite photo as well.
Children will outgrow the toys, clothes and virtually everything you give them. A whole life insurance policy is different. You can set an example by instilling the value of financial responsibility with something that may one day help protect their families and fund their life’s big events. (Related: How whole life insurance can help through life stages)
Of course, kids being kids, they might not appreciate the concept of a whole life insurance policy amid the candles and cake of a birthday or the wrapping paper and surprise of winter holidays. So, depending on the age, it’s probably a wise idea to have a toy to toss into the mix. That toy will likely break and be forgotten at some point. The whole life insurance policy? Likely not.
How to buy a life insurance policy for a child or grandchild
Buying life insurance for a child can be pretty easy. Usually they don’t have much of a complicated health history and generally there is no medical exam required. You’ll need to have basic information for the application: name, date of birth, relationship and Social Security number.
But certain limits and restrictions can make children’s policies different than purchasing whole life insurance on an adult. Generally, the insurance coverage will be limited to a maximum percentage of the coverage that the parents have on themselves. This is the case even when grandparents are the ones buying the life insurance policies. The thinking is, why would anyone have insurance policies on children and not have at least some sort of insurance on their parents? Despite this restriction, children can usually get some coverage, even if their parents are unhealthy and do not qualify for life insurance. Also, you can’t play favorites — siblings need to have equivalent amounts of life insurance coverage. (Related: Keeping heirs from fighting)
Another important element is who will own the life insurance policy. The policy must be owned by either the parents, grandparents, or a trust. There are multiple factors to consider when determining ownership. These include the size of the insurance policy, control of the policy values, and gift tax implications.
With all of the various decisions to make when it comes to purchasing a whole life insurance policy for the special children or grandchildren in their life, many people opt to consult a financial professional who can evaluate their personal situation and help navigate the options available.
Learn more from MassMutual…
The logic of life insurance for children
Understanding life insurance riders
This article was originally published in September 2016. It has been updated.