Permanent Life Insurance for Kids is a Smart Start in Life
Life insurance for children can serve several important needs, and is a great way to gift money in a way that creates value several ways at the same time. First, it is life insurance, and while nobody expects a child to need this for a long time, getting a permanent policy on a child allows them to leverage their age to enjoy lower premiums, no special medical exam, and a high probability of getting an offer from an insurance company.
Insurance companies only offer permanent insurance on children when they are the sole insured of a policy. (Some policies on adults allow for children to be insured through a rider on the adult’s policy, until the child reaches a certain age; usually 18) But when a child has a stand-alone policy, that policy is generally permanent, and in the case of a whole life policy, the premiums are guaranteed to never increase, thereby locking in a low premium because of the insured’s age.
Benefits of Permanent Life Insurance for Children and Kids
Along with life insurance benefit, there are several other benefits that can generally be included in a good whole life policy.
- Tax-free cash-value growth. Generally, a permanent life insurance policy has cash-value, and this cash-value can growth several ways; in the case of whole life, it grows on a guaranteed schedule, and if the policy is “participating”, it can grow additionally through dividend payments that may be paid by the issuing carrier. In the case of universal life, cash-value is credited differently than whole life; please read the general article about universal life in general and then about the three methods of cash-value crediting.
- Tax-free access to cash. A permanent policy, properly maintained, will generally experience cash-value growth over time. This growth can generally be accessed tax-free, even when more money is taken from the policy than was originally put in. A knowledgeable, experienced agent can explain how to decide the method of accessing cash-value, so you continue to have the policy in the future, operating the way you wish it to.
- Future increases without proof of insurability. Some carriers allow the insured, and/or the owner the ability to increase coverage, at certain milestones of the insured, without the need for the insured to prove they are insurable. This can be very valuable, especially in the case of genetic diseases, which may not manifest themselves until the child is older.
- Waiver of premium due to disability. This feature is typically a rider that can be applied for at the time of initial application that provides for the insurance company to pay the premiums for some period of time, (including up to the policy’s maturity date) should the insured become disabled and meet the criteria to activate the benefit.
- Accelerated benefits. If your contract has this provision or rider, it allows the policy owner to access a certain percentage, or defined amount of the death benefit, in the case of a diagnosis of terminal illness of the insured, as defined in the policy.
Who owns the policy?
Usually a parent or a grandparent wants to start an insurance policy for a child, and be the payer for the gift. In the case of a parent, or legal guardian, this is very simple, in the case of a grandparent, they need the permission of the parent or guardian. Other relatives or friends who to give this gift, can be designated the “payer” of the policy, but insurance companies then usually requires the parent or guardian to be the owner of the policy. The owner of the policy has all rights allowed in the policy, including, changing beneficiaries, adding additional cash to accelerate growth (if allowed by the policy), changing beneficiaries, speaking with an agent or the insurance company directly about the policy, and accessing various features in the policy, as well as transferring ownership. The policy owner also gets notification if a premium payment is not made by the designated payer.
Automatic transfer of ownership.
Typically, upon the death of the policy owner, the insured becomes the policy owner by default, provided the insured has reached the age of majority in the jurisdiction where they live (18 years old or older in most states). Another possibility is the owner naming a successor owner; this is a good idea in the case of a grandparent owner who may pass away before the child insured has reached the age of majority, since the policy’s ownership could be in question and have to be decided by a judge, or an executor. Another consideration is the maturity of the insured at the time they become the policy owner; a young adult may not yet appreciate the value of a policy started for them years earlier, and may wish to surrender the policy for the thousands of dollars, potentially accumulated in the policy, or they may stop paying premiums, and force the policy into a non-fortitude mode, so that the policy fails to continue to create additional value for the long-term.
Not all of the features and benefits mentioned above are offered by all companies, so it’s important that you choose an agent carefully, so you can get a full understanding of what the policy you choose can do, and how it should be operated over time.