Buying Life Insurance For Grandchildren

Grandparents often think about buying a life insurance policy for a grandchild. However, they may get confused by how that actually works. Grandparents may wonder if this is even legal.

They may be curious about the pros and cons of a grandparent buying life insurance for grandchildren. Grandparents may want to know what they will need to set up a life insurance policy for a minor child. There are plenty of questions for us to explore when it comes to buying life insurance for grandchildren. Let’s get started!

Can A Grandparent Buy Life Insurance for a Grandchild?

Yes, it is completely acceptable for grandparents to buy their grandchild life insurance. The ability to take out a life insurance policy on another individual is defined by “insurable interest”. Insurable interest is usually determined by whether the policyholder (the person that pays for the coverage) will suffer a financial setback as a result of the insured’s death.

This definition is what makes it okay for ex-spouses with children, business co-owners, and current couples to purchase life insurance on their respective partner’s life. Each has the potential to suffer a financial hardship as a result of the insured’s death. This applies to grandparents as well since they are viewed as supplemental caregivers of their grandchildren.

What’s The Benefit of Life Insurance for a Grandchild?

There are numerous benefits to grandparents buying life insurance for their grandchild. It can help with college funding, financial and estate planning, creating future insurability, and even offering security to grandchildren with health or mental conditions. Life insurance for grandchildren is actually a gift to enhance their young lives.

Funeral Expenses 

The majority of parents do not have a life insurance policy on their children. Many won’t purchase a life insurance policy for their children because they don’t want to “jinx” the child’s health and well-being.

It’s important to keep in mind almost 4,000 kids die every year from gun violence, childhood cancer, accidents, and various other illnesses such as the flu. The death of a child is certainly not something anyone likes to think about. However, if the unthinkable does happen, Mom and Dad will have to quickly come up with a large amount of money to cover final expenses. Remember, the current cost of a traditional funeral and burial ranges from about $8,000 to $10,000.

If you decide upon a cremation then you can still expect to pay about $3,000 to $5,000. Parents that do not have enough money to cover their child’s final expenses will usually turn to grandparents for help.

A life insurance policy can bring some comfort to families facing the difficult task of burying a child. It’s always a better option to have funds in place rather than having to crowdfund for the burial of a child.

Charitable Organizations

In addition to the obvious use of paying for a child’s funeral services, the life insurance policy death benefit can also cover the parent’s missed income. This life insurance death benefit can allow the parent time away from work to deal with the grief of losing a child. Proceeds from the death benefit can also be used for grief counseling to help heal the family.

Finally, parents can use money from the life insurance policy to establish a charitable fund or scholarship in the name of their deceased child. This can bring a great deal of solace to the family. It is a wonderful way of creating something positive in the child’s memory.

College Funds

According to the College Board, the average cost for the 2017–2018 school year is about $34,000 for in-state students at a private college and $10,000 for in-state students at public colleges. These figures reflect the average cost for tuition and fees.

If this is the price tag for one year of school right now then what will it be in five or 10 years? Probably more, right? College pricing never goes down but, instead, continually increases.

Having a nest egg of cash building value in a whole life insurance policy could come in handy for your college-bound grandkids. Many financial planners will tell you to open a 529 college savings plan for the future instead.

Although a 529 savings plan can be a great option, a whole life insurance policy will be more flexible in the long run. For example, maybe your grandchild will not want to continue their education after high school. If that’s the case then your 529 savings plan isn’t going to be much help!

On the other hand, if you started a whole life insurance policy for your grandchild when he/she can borrow against the cash value that’s built up in the plan. This means your grandchild can use the life insurance loan feature for a non-education expense such as a downpayment on a new home, seed money to start a business, or money for a new vehicle.

Whole life insurance for a grandchild offers more flexibility to the insured even when he/she decides against pursuing a traditional university education.

Another upside to a whole life insurance policy is that it does not have to be declared on financial aid paperwork. So the cash value built up in your grandchild’s life coverage will not hinder him/her from getting the financial aid they need.

Financial and Estate Planning

Most grandparents hope they will be able to pass along something of value to their grandchildren. Life insurance is an excellent, hassle-free way to transfer assets to your grandchildren. This is because a life insurance benefit is income tax-free, gift tax-free, and estate tax-free.

The death benefit amount and the cash value that builds is what will be passed to the next generation without any hassles. You simply identify the beneficiary of the policy and they will inherit the funds. When the child is a minor, the parent is normally the designated beneficiary. Once the child reaches 18 years of age, you can certainly designate the grandchild as the beneficiary.

Money can be borrowed against the life insurance policy and passed along to your grandchildren now. You can borrow the money as the policyholder or your grandchild can borrow the money once he/she is an adult. This money will be a tax-free gift to your granddaughter or grandson.

The funds can be used for whatever they need such as private school tuitions or their first car. If your grandchild has chronic health issues or special needs, the ability to borrow money from their whole life insurance policy can be helpful in paying for medical care.

Your grandchild’s life insurance policy may also have the option of surrendering the policy (minus a surrender fee) when they come of age. Once again, the payout amount will be tax-deferred.

Future Insurability

Many grandparents like the idea of juvenile policies converting to adult coverage in the future, regardless of the grandchild’s health. This can be even more beneficial if your grandchild is diagnosed in the future with a chronic or life-threatening illness.

So long as the policy’s premium remains current then your grandchild will have a secure whole life insurance policy that gains cash value for life.

Each life insurance company has different rules and terms for their juvenile policies. Some life insurers will double the face amount when the grandchild turns 18 years of age without a premium increase.

Other life insurance companies offer a higher face amount for an additional premium. There are life insurance policies you buy that require only one lump sum premium payment at the time the policy becomes effective. In this situation, no additional premiums will be due until the grandchild becomes an adult.

At that point, your grandson or granddaughter can decide to continue the life insurance plan into the future and begin paying monthly premiums to keep the coverage in effect.

How Do I Set Up A Life Insurance Policy For My Grandkid?

Now that you’ve decided a life insurance policy is a beneficial investment for your grandchildren, what’s the next step? What information will you need to set up the policy? How much money can you take out on your grandchild? What other information do you need to know?

Information and Consent Needed

First, you will need to obtain your grandchild’s full name, social security, date of birth, and home address. You will also need to obtain Mom and/or Dad’s full name, social security number, date of birth, and home address since you will most likely be naming them as the policy’s beneficiary.  You can designate both parents or only one. This is your choice.

Some insurance companies will require that Mom and/or Dad give written consent for you to take out this life insurance policy. Usually, that simply means the parent(s) will need to sign the life insurance application.

If the parents are not legally married, just the custodial parent’s signature is needed. Other insurance companies do not require any written consent from the parents.

If a grandparent is taking out a life insurance policy on an adult grandchild, the grandson or granddaughter to be covered must give their own written consent. Again, this usually means the insured will need to sign the insurance application.

You will want to talk with your independent life insurance agent about the requirements for the specific juvenile life insurance policy you are most interested in buying.

Face Amount & Cash Value

Children have no real earning power so their “Human Life Value” (HLV) is much lower than an adult. In most cases, a child’s HLV is half of what their parent’s HLV would be. This means the death benefit amounts for juvenile policies are capped at lower amounts. The death benefit is usually $50,000 or less.

Another thing to keep in mind, the lower the face amount then the less cash value the life insurance will build. So if you are looking for $100,000 of dollars in cash and coverage for your grandchild, a juvenile life insurance plan may not be the best option. You should talk more with your financial planner or independent insurance agent for ideas about what will work best for your grandchild.

Consider Insuring Older Generations First

Many insurance agents and financial advisors recommend you insure the oldest generation first. Being sure older generations have enough cash to cover final expenses and any personal debts indirectly keeps your grandchild financially secure. Think about it.

You and/or your own children have a higher chance of passing away much sooner than your grandchild. The need for life insurance is more immediate for older family members. Not having enough money to cover an adult’s debts will certainly trickle down to the grandkids.

For example, if you do not have at least a burial policy for your final arrangements, then your children will have to scramble to cover this cost. Perhaps they will need to withdraw $10,000 or more from their retirement funds or your grandchild’s college savings account.

This unexpected expense puts Mom and Dad in a precarious situation. They may not be able to replace the money they borrowed from a personal account which can impact your grandchildren in the years to come.

Another benefit to your children having their own term life insurance policy is the option to add a term life rider covering the grandkids too. A juvenile life insurance rider usually offers a small face amount of $20,000 or less covering for juveniles.

A term life insurance covers for a set amount of years. Most term policies are 10, 20, or 30 years of coverage. The benefit rider is normally a minimal amount of additional premium such as $5 to $10 per month.

As you can see, there are many benefits to grandparents buying life insurance for their grandchildren. Talk with your independent life insurance agent about your own situation and how best to give the gift of life insurance to your grandkids.

Finding the Best Insurance for Your Grandchildren

When it comes to finding the best burial insurance plan for you and your family, it is essential that you compare your options first.

Depending on your age and health, your life insurance rates can vary from company to company.  For this reason, we recommend working with an independent life insurance agent who can help you compare with some of the best burial companies.

Give us a call today to speak with one of our agents in order to find the best burial insurance companies for you and your family. Or, get started using our online quoting tool for quick and easy burial insurance quotes.

Compare the Best Burial Insurance Rates

Affordable rates, insanely fast quotes