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.
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 responsible—not 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.”