As a grandparent, you love your grandchildren as much as you love your own children. Knowing that they will be supported beyond the years that you are alive is a happy and rewarding thought. You may have decided the best way to ensure this happens is to purchase a life insurance policy for them. But you may be struggling with the question, “How much life insurance for my grandchildren should I buy?” Below we highlight some insurance basics that should help you answer that question.
What Is Child Life Insurance?
Child life insurance is a protection offered through insurance companies in exchange for paid premiums. A cash benefit is paid to the policy’s beneficiary in the event of the insured person’s death. Traditionally, life insurance for adults is purchased to protect the survivors from the loss of income of the deceased. But while child life insurance does provide a cash benefit upon death, it is more commonly bought with different intentions in mind. These intentions usually center around some type of direct benefit to the child or children named on the policy.
Am I Able to Purchase an Insurance Policy for My Grandchildren?
A person is able to purchase life insurance for another person, be it a spouse, parent, child, or grandchild, as long as they are able to demonstrate insurable interest. There are 3 parties involved in an insurance contract: the insured person (the person whose life is being insured), the beneficiary (the person who will receive the benefit when the insured person passes away), and the policy owner (the person who owns, controls, and pays for the policy).
Demonstrating Insurable Interest
Insurable interest means the people involved must have a relationship, and the insured person must consent to having the policy. In the case of a minor, a grandparent wanting to purchase life insurance for grandchildren would simply need to demonstrate cause. An example would be if the grandparent were to suffer emotional or financial consequences as a result of the child’s passing. Another example might be if the grandparent is looking to use the policy as a financial tool to help pay for college or another monetary commitment.
Medical Underwriting, Requirements, and Limitations
One of the most common factors used to determine the face value of a life insurance policy is income replacement. Because children rarely generate an income, there are limits as to how much life insurance can be taken on a child. Insurance is generally evaluated on a case-by-case basis depending on the need and purpose that is demonstrated. While there is no fixed number for the benefit amount, the ceiling is often lower for a child than an adult due to the human life value, or lack of earning power a child has.
In most cases, grandparents only need to provide some basic facts like Social Security number and address of the child in order to purchase a policy. Each state has different requirements, and some require the consent or signature of a parent prior to taking out a policy on a child. For this reason, it may be a good idea to seek permission from a parent prior to starting the process.
Generally, there is not much medical underwriting involved in a child policy. Usually children do not have to undergo a physical exam if they were born healthy and remain so. But the parent or guardian may be required to answer some questions regarding the child’s present health and family medical history.
Reasons to Buy Child Life Insurance
High Value at Relatively Low Cost
Children are generally young and in good health. This works in their favor when it comes to gaining affordable insurance coverage. Buying life insurance for your grandchildren now means that you are guaranteeing these low-cost premiums for life if you select a whole life insurance policy. The younger the child is at the time of the purchase, the lower the premium is likely to be.
Because we lose our insurability as we age, securing life insurance at an early age means guaranteeing long-term security for your grandchild. Developing a disability or chronic illness can hurt their chances of gaining life insurance at an affordable rate, and in some cases, it can prevent them from ever acquiring it.
A permanent life insurance policy will not only provide a death benefit, but it can earn cash value as well. This cash value will grow with your grandchild and increase over time. This is money they can borrow against later in life to put down on a house or to use toward a business venture. And generally, this money is tax deferred.
The video below shows how cash value can add up to quite a sum for college or other life expenses for your grandchild.
A Financial Head Start
More and more grandparents are giving life insurance as a gift. The gift of child insurance from a grandparent is a meaningful one that can last a lifetime. More than 50% of grandparents rank financial security as a major factor in establishing a successful life. By gifting life insurance, you are teaching a legacy of financial responsibility to your children and grandchildren. Many grandparents use life insurance policies as a teaching tool for their heirs. And the gift of life insurance can be given up to $14,000 per child without any federal gift tax liability.
No one wants to believe that anything bad will happen to the ones they love, but life is unpredictable, and bad things can and do happen. Probably one of the best ways to combat life’s tragic moments is to have a feeling of preparedness. While protection won’t ease your emotional burden, it can help with the financial one.
Parents are often emotionally and financially unprepared for the death of a child. Having a life insurance policy for your grandchildren can provide some comfort to an adult child dealing with the cost of final expenses. If you are one of the 2.5 million grandparents who act as a guardian to a grandchild, child life insurance can afford you some money during a time when you may not earn an income or be in a position to borrow from savings. If your dependent were to become chronically ill, a life insurance policy could help offset treatment costs and prevent medical debt from accruing as a result of their illness. Many life insurance policies feature accelerated benefits that can help during a time of crisis.
Will Child Life Insurance Help With College?
A popular use for child life insurance is to help with tuition costs. The cash value of an insurance policy for grandchildren can be borrowed against to help with any rooming, books, or tuition costs associated with attending school. Unlike a 529 plan, the accumulated cash value in a life insurance plan will not count against a student who is applying for financial aid. If your grandchild decides he or she wants to pursue a different career or type of schooling, cash value can be borrowed against for any reason. It does not carry the common stipulations and restrictions associated with other college savings vehicles.
The video below explains how child life insurance can be a better financial tool for college planning than a 529 plan.
How Do I Gift Life Insurance?
You can transfer ownership of a life insurance policy to your grandchild once he or she reaches adulthood. This can happen at 18, or up until the age of 25 is common. If you were to pass before your grandchildren reach the age of majority, the child’s parents could continue the insurance in their name instead of yours.
How Much Life Insurance for My Grandchildren Do I Need?
How much life insurance to buy is a personal decision. The correct amount really depends on the facts and circumstances surrounding your purchase. In order to know what is the right amount of child life insurance to buy, you must identify the reasons for making the purchase in the first place.
Define the Purpose
Is your intention to have protection for yourself and cover expenses regarding your grandchild as a dependent? If so, then your main goal is likely to be buying just enough coverage to handle final expenses and any related medical bills. This can generally be done with a relatively small cash benefit of $10,000 to $25,000.
If your goal is to give a gift of child insurance to your grandchild, then you have other considerations to make. Gifting an amount of, say, $100,000 or so provides a good foundation but also leaves room for the insured to add more protection as income, assets, and responsibilities begin to grow.
Unless the premiums are going to be transferred to a parent or someone other than your grandchild, at some point the child is going to have to assume the responsibility of paying them. Lots of life insurance policies are left to lapse. An inability to pay the premiums is a major reason why. For this reason, you want to be sure you select a coverage amount that has premiums your grandchild will be able to maintain.
Avoiding Gift Taxes
If you are concerned about being responsible for gift taxes, then you may want to restrict the benefit amount. Gift taxes do not apply until the policy gets transferred to the parent or grandchild. But when the transfer happens, if the face value of the policy is greater than $14,000, you will be responsible for paying tax.
A licensed HealthMarkets insurance agent can help you to select life insurance for your grandchildren. Call (800) 917-4169 today to get a free quote on child life insurance. Our team of professionals can help you figure out the best policy and amount of coverage for each of your grandchildren, or visit us online to locate an agent in your area.