5 Surprising Benefits of Whole Life Insurance for Grandchildren and Children

Should you get life insurance for grandchildren? What about children? Don’t people only “need” life insurance if they have a family to support? Why do people insure their children and grandchildren, and does it make any sense to insure your heir?

Not only is it possible to buy life insurance for grandchildren and children in general, there are many good reasons to! We believe that life insurance is a WANT, and there are several reasons why many people–who have done their due diligence–WANT to get life insurance for their children.

Benefits of Whole Life Insurance for Grandchildren and Children

1. Maximized Cash Value Growth When You Buy Life Insurance for Babies of Young Children

The younger the insured is, the lower the cost of insurance is within the policy. This means that cash value builds up more quickly, which means it also compounds on a greater volume early on. The internal rate of return on a whole life policy on a child that is also engineered for maximum cash value (optimizing paid-up additions) is currently around 4 to 5%. That’s at least 10 times better than most bank CD rates!

This ability to store cash with certainty at a respectable rate of return is especially attractive for people over 60. You can save without the risks of the stock market. Or perhaps, you can use a policy as a tax-advantaged vehicle for cash that you remove from a 401(k) in a pay-down strategy. Life insurance for grandchildren or children, if you own it, can help you avoid an annual tax bill on the growth savings.

Best of all, the money can be collateralized with loans, which are of course tax-free. That means your money can keep growing even while being leveraged for an emergency, opportunity, or major purchase using a Prosperity Economics whole life insurance strategy.

Life insurance is often thought of as “insurance against death,” yet whole life insurance is structured to provide benefits during the whole life of the policyholder. Many of the strategies used to benefit from whole life during your life are described in the powerful little book, Live Your Life Insurance.

2. The Estate Planning Benefits are Virtually Unparalleled 

This is a major motivation for many people who would like to transfer assets to heirs. If your intention is to transfer some or all of your wealth to heirs, life insurance for grandchildren or children is one of the very best ways to do it. You can pass nearly unlimited amounts of cash to the next generation via a “transfer of the policy to the insured” income-gift-and-estate-tax-FREE. There’s no need for probate, a trust, or even a will with life insurance! (Although trusts can be useful, and we always recommend having a will.)

Note: (A policy may be subject to gift taxes if the policy is paid-up, though the threshold is quite high. Estate taxes may also play a factor if the policy is part of your estate.)

I can’t tell you how many times I’ve had to repeat that last sentence to stunned clients hearing this revelation for the first time. “Wait a minute… estate and income and gift tax-free?” Yes, you heard correctly. There are no taxes when giving a life insurance policy, no matter how much cash value it holds, back to the insured. No mess, no fuss, no interference from the IRS or the state. You can also name them a beneficiary of a policy that insures you, which allows the death benefit to go to them free of all these taxes, too.

Getting whole life insurance for grandchildren has its benefits

3. The Flexibility and Liquidity of the Savings is Compelling

Cash value can be used in endless ways for the benefit of the policy owner and the insured child or grandchild. As discussed in “Financial Flexibility: Saving Too Much in All the Wrong Places?” we are often advised to save in ways that divide our wealth up into accounts that we don’t control or can’t easily access. Too often, “our” money doesn’t feel much like ours as it becomes subject to the rules of our employer, the government, or some other entity.

Yet in a whole life policy, the policyholder retains the ability to withdraw or collateralize the cash value—even when the insured is a child or grandchild. If you pay for the policy, the cash value is yours to govern as you see fit. And one of the best parts is, it’s replenishing. So while your child or grandchild is young, you can build the policy and use it for your own purposes. Then as they grow, you can use it to teach them how to steward their money.

An Example of Whole Life Insurance on a Grandchild

What if your intention is to save for future college tuition for the insured child? Investors are typically advised to save money in the ubiquitous 529 savings plan. There are upfront tax savings which might be attractive, though if college plans change, this will backfire. When saving in a whole life policy, the policyholder is not subjected to the restrictions of a 529 plan. The cash value can be used or borrowed against by the policy owner should they need it for retirement or non-education expenses. It can be withdrawn or leveraged to help the child purchase a car, a home, or start a business.

If the child goes to college as planned, the money saved in a whole life policy won’t have to be declared and counted against them when it’s time to qualify for financial aid. And if the child chooses not to take the traditional university route, the cash value can be used to fund a business, volunteer work, a self-designed internship, or other alternative life-education experiences.

4. Insurance Covers Expenses in the Rare Case of Such a Devastating Loss

While a commonly understood benefit, this is the one that nobody wants to talk about. Insurance for children is inexpensive, but funerals, memorial services, and other final expenses are not. Nobody deserves to be burdened with sizable expenses or debt in a time of grief. But final expenses aren’t the only financial concern that motivates some parents to get life insurance for their children (or grandparents to get life insurance for grandchildren).

Life insurance traditionally insures the “human life value,” or lifetime earning value of the insured. Of course, you can’t possibly know what a baby’s lifetime earning potential is. So in the case of whole life insurance for grandchildren and children, the grandparent or parent taking out the policy is also insuring their own income, which they know would be impacted in the event of such a loss.

As one mother put it when a financial advisor asserted online that you should “never” purchase insurance for children,

“I am a mother of two, and the primary breadwinner for the family. And I can tell you right now, though the chances are slim, if something were to happen to either of my children, I’m not sure when I’d be able to return to work. I can’t even make a guess. So for me, having a financial cushion to make it possible for me to grieve without the worry of when and if I can return to work is a priceless safety net.”

Additionally, some parents have been able to use life insurance benefits to fund charitable works done in the child’s name. They find that the ability to leave such a legacy gives some meaning in the midst of loss. Especially if it can bless other families who may be experiencing similar challenges.

5. Future Insurability is Guaranteed

Some policies may even offer an option to purchase additional insurance in the future (up to $2 million), regardless of future insurability. So much can happen between birth and adulthood that this can be invaluable. While insurability is only rarely an issue for a minor, how often do young adults in their 20s and 30s “intend” to get life insurance, yet never get around to it?

Guaranteeing insurability is a lifelong benefit for the insured, whether they are one year old or twenty-one. And, even if that child does not (or cannot) buy another policy, at least they have one that’s been growing steadily and can be leveraged over the remainder of their life.

Are There Downsides to Children’s Whole Life Insurance?

Yes, the insurance industry has some rules and restrictions and you’ll want to be aware of the limitations. For instance, you’re somewhat limited in how much insurance you can purchase, which limits the amount of cash value you can build. Starting a family bank (as high cash value policies are often referred to) also requires a lot of communication and cooperation.

For more details about insuring children and grandchildren… see the post, “How to Buy Life Insurance for a Child.” It explains the process and includes some tips and instructions for starting a family bank!

Check Out Further Content About Building Generational Wealth!

You can find our book, Perpetual Wealth: How to Use “Family Financing” to Build Prosperity and Leave a Legacy for Generations, on Amazon in all formats.

Perpetual Wealth contains our BEST strategies and tips for:

  • Building bullet-proof wealth that lasts for generations.
  • Raising children to be financially responsiblenot entitled.
  • Structuring life insurance policies for multiple generations and optimal cash value.
  • Developing the human capital of your family.
  • Wisdom from the wealthiest families on “do’s” and “don’ts.”
  • Examples of family retreats, family mission statements, and a letter to an heir.
  • And how to leave a legacy that lasts!

Authored by life insurance expert Kim Butler and wealth coach Kate Phillips, Perpetual Wealth is the most complete resource around to help your family build generational wealth. The book integrates an engaging story with wisdom gleaned from affluent families and estate planning attorneys, along with the practical “how to” of using whole life insurance to build a family bank.

You’ll want to use this book as a resource for years—and generations—to come! For more on Perpetual Wealth, read this excerpt in “The 4 Cornerstones of Generational Wealth.”

20 thoughts on “5 Surprising Benefits of Whole Life Insurance for Grandchildren and Children”

  1. Enoch Huckbert Sr.

    It’s intriguing that you point out that life insurance passes on money to your children without being affected by the same taxes that a regular inheritance would. I want my kids to be as financially secure as possible when I die, so buying a life insurance policy this October sounds like the smart thing to do. I’m going to search for a reputable business in my area that can sell me a life insurance policy.

  2. A whole life policy owned by a grandparent on a grandchild does not show up as an asset of the child when applying for financial aid for college.

    1. Right you are, James! Whole life can be an effective way to save for tuition costs without sabotaging the student’s chances for financial aid qualification.

  3. Is there a website where I compare best companies to purchase whole life insurance on myself, to be divided to six grandchildren equally upon my death, or do I need to get quotes and medical exams for each company i inquire about? How do I evaluate their costs too please?
    In addition, do I need to place this insurance policy in a specially named trust for all the grandchildren, or just list each grandchild on the policy as a beneficiary? Like to use this as a tax strategy to take value out of our estate, and leave them money they do not have to pay taxes on too. Most are over 18 years except for one 17 yr. and 1 15 yrs. old.

    Look forward to your reply.
    Thank you,

    1. Hi Jeanette, Prosperity Thinkers works with some of the top whole life companies and we can help you compare companies and policies. I would also refer you to this article for some additional important information about life insurance companies: https://prosperitythinkers.com/whole-life-insurance/life-insurance-questions-before-applying/

      We are not aware of any website that provides whole life pricing. It varies with age, state, health, gender, type of policy, riders, and more, so the policies are quite customized! As far as costs, guarantees and illustrations are based on NET gains, after costs. And we can get you those specifics.

      As far as trusts go, they are very useful in general, though not always essential just for life insurance. We encourage you to read our book Perpetual Wealth: https://prosperitythinkers.com/book/the-perpetual-wealth-book/.

      The book is about using life insurance for generational wealth and legacy purposes. It discusses wills and trusts and issues with younger beneficiaries (and why we recommend a trust until beneficiaries are at an age where you would not be concerned about their ability to manage money). Insurance companies cannot disburse funds to minors, so there needs to be some sort of workaround.

      I will have one of our team members reach out to you to see if we can be of assistance!

  4. Prosperity Thinkers

    Hi Leslie, I apologize for the long delay in an answer; the reply fell through the cracks! From Theresa Sheridan, Kim’s assistant:

    Typically Insurance companies won’t allow insurance on grandkids without a parent signing. However, I believe the short answer is it sounds like your daughter can call the insurance company and find out if she is the owner or beneficiary. If not, she does not have control of the policy and cannot terminate. Perhaps the daughter owns her own policy now? If she or her daughter owns the policy then the company can tell them that.

    Thank you,
    Theresa Sheridan

  5. victoria deblase youngblood

    Is this right?- I could buy a whole life insurance policy naming my grandchildren as heirs and they can receive the cash value when I die with no tax penalties? What is too old to do this? And if I do this, can I borrow against this policy occasionally when I need a small loan?

    1. Prosperity Thinkers

      Yes, Victoria, there is no income tax, capital gains or gift tax when beneficiaries receive life insurance benefits! There can be estate tax in some situations for those with significant assets, though there is also a strategy in which you can pass along the cash value while you are still alive. (Consult Kim for details, you can email her at we*****@pr****************.com)

      To clarify, beneficiaries receive the death benefit, which would be an amount larger than the cash value. (Cash value represents the amount of the total benefit that you have access to, and if you live long enough, it will grow to equal the death benefit.) And typically you can get life insurance until age 85 if you are reasonably healthy.

  6. My daughter has 4 grandchildren and no life insurance policy,should anything happen,i am concerned the children will end up being taken into care,I would like to take out an insurance policy on the children to help prevent this happening.

  7. Deanna R. Jones

    I didn’t know that there are benefits to having life insurance that would even affect my estate planning. It’s good to know that I can transfer some of my wealth to my children and grandchildren through my life insurance premium. It’s no wonder there seem to be many people who want to have life insurance to pass down unlimited amounts of money to their children and grandchildren.

  8. Prosperity Thinkers

    Fortunately for your nephews and nieces, the ONLY people with a right to the policy benefits are the beneficiaries that your mother has named. Good luck with the family dynamics.

  9. It frightens me to death (pardon the pun) that neither of my adult children have life insurance. I really would love to get them some life insurance cover, and also for my beautiful granddaughter. how can i go about this please?

    1. Prosperity Thinkers

      I understand your concern!!! Kim and/or Theresa (our multi-generational insurance specialist) will be in touch with you soon.

  10. As a follow up to my previous question about the ability to “pass unlimited amounts of cash to the next generation via a “transfer of the policy to the insured” income-and-estate-tax-and-gift tax FREE” does this apply when I (Mother) buy a policy on my adult child? or is this only applicable when a generation is skipped (in other words, when I buy a policy on my grandchild)?

    1. Prosperity Thinkers

      Thanks for the question, Beth, I’m pretty sure there’s no difference, but I’ve forwarded your question to Theresa and Kim, they are the experts, just to make sure! Someone will be in touch with you (if they haven’t already.)

  11. Would you please clarify the points you make in section 2 where you state “You can pass unlimited amounts of cash to the next generation via a “transfer of the policy to the insured” income-and-estate-tax-and-gift tax FREE… with no need for probate, a trust, or even a will.” My question is: Can this ‘transfer of the policy to the insured’ occur at any time? or only upon the death of the owner (in my case I would be the owner/grandparent)?


    thank you. you have very good info on buying insurance on child and grandchild. and thats also buy whole life policy from mutual ins co,and thats also participating dividend paying policy.this type of policy can also work as family bank.it will be grate to know more about this concept that this can be used as an eastateplaning tool also.next week i will be glad to be more informed on this concept please. thank you.

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