Life insurance is a financial tool that everyone needs. No matter how young or old, there is a 100% chance that a person will pass away. I believe that a parent/ grandparent should insure their child/ grandchild in their younger years because of premium cost, insurability, cash value growth potential, and tax advantages.
1. Cost
The younger that you are, the more affordable it is.
2. Insurability
Life insurance is underwritten based on medical history and age. As a young child, the underwriting guidelines are more liberal which makes it easier for a young child to get approved. Adults usually have to undergo a physical exam, blood draw, and urine sample for the insurance company. Plus, coverage cannot be cancelled as long as premiums are paid even if a person’s health situation changes. That’s why insuring a young child in their younger years is beneficial since it locks them into a premium and a favorable underwriting class.
In addition, highly rated insurance companies such as New York Life offers a rider- Policy Purchase Option (PPO) that gives the insured the right to increase their coverage at designated dates regardless of insurability. This takes the worry of someone’s health changing which could make them uninsurable and unable to obtain insurance coverage.
3. Cash value
With a permanent policy such as a Whole Life, Universal Life, or Variable Universal Life policy cash values grow through the years. Therefore, the longer you have your policy, the more cash value you should have. Cash value can be accessed for whatever reason; most parents choose to use the cash value to fund education, down payment on a home, travel, or just an extra bucket of funds. The cash value is not subject to the 59 rule that you experience with 401ks, IRAs, or Roth IRAs.
4. Tax advantages
Under current law the cash values grow tax deferred within the policy. The insurance benefit is tax free to the beneficiaries.
Also, funding a permanent policy for the purpose of cash value growth can be maximized to reach high values and still within IRS limits. When a child applies for college financial aid his/ her parents must complete a FAFSA (Free Application for Federal Student Aid). Parents must list assets which includes checking and savings accounts, investments etc The cash value in a permanent policy is an ASSET but DOES NOT need to be listed on the FAFSA. Therefore, preparing your child/ grandchild with a policy in their early years will not affect their chances of qualifying for college financial aid.
In summary, by giving your child/ grandchild the gift of life insurance prepares them for their future. You are locking them into an affordable premium for the rest of their life, you locked in their insurability, you are helping them build cash value that they can use for future expenses such as a house, education, retirement, and cash value that they have access to. If you would have invested in a 529 plan instead the entire account balance can only be used for education (otherwise you have penalties). What if your child decides not to go to college but has a great idea to invent a product or start his/ her own company?
And the best yet is that when they start their adult life by getting married, having children, acquiring debt, they will THANK YOU for getting them life insurance as a child because now they don’t have to get as much in their older years and wind up paying a whole lot more.