Why Buy Whole Life Insurance for your Dependent Children…?

Why Buy Whole Life Insurance for your Dependent Children…?

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Many of my clients often ask me if they should buy life insurance on their newborns and small children.  The answer is unquestionably… yes.  If the client has the foresight and extra dollars, it is a great idea to establish these policies early on in your child’s life, especially since there is limited or no medical underwriting depending upon their age at issue.  Once children start to visit doctors, medical records may have to be collected.  People forget that life insurance is all about the long haul and the sooner you buy these contracts and the longer you fund them, the better they perform financially.

The vast majority of carriers refuse to issue term insurance policies taken out on small children due to the lack of insurable interest.  Most will only issue permanent products such as whole life, universal life or variable life. Since a term insurance policy is designed to cover a specific need or temporary financial liability, carriers cannot rationalize the purchase of this type of policy for a child since determining that liability is virtually impossible.
There are a great many advantages of your children owning permanent Whole Life insurance:

  • You the parent or guardian control the policy until such time that you decide to transfer ownership.
  • You are purchasing the life insurance at the most competitive rate due to the child’s age.
  • You are establishing your child’s insurability immediately in case they become chronically ill.
  • You can pay these policies up in 20 years so your child does not have to pay the premiums forever.
  • You are buying a policy that your child can own and utilize for the rest of their lives.

Let’s look at an example of how a policy purchased for a young child compares to a policy purchased by an adult:

 

$100,000 Whole Life Policy Male Standard Issue Age 5 years

$100,000 Whole Life Policy Male Standard Issue Age 35 years

Annual Premium

$635

$ 1,474

Cumulative Premium in 20 years

$12,700

$29,480

Initial Death Benefit

$100,000

$100,000

Death Benefit in 20 years

$123,325

$124.349[1]

Other benefits to your child owning permanent Whole Life insurance:

  • A permanent lifelong death benefit to age 120.
  • A Whole Life insurance policy locks in the premium and ensures the child has coverage, even if they get sick.
  • A Waiver of Premium Rider guarantees premiums are paid to age 60 if child becomes permanently disabled.
  • The buildup of a tax-deferred cash value savings vehicle inside the insurance policy.
  • Discretionary access to tax-free income before age 59½ without a credit check or lender approval[2].
  • Most policies are established as tax-free private pension plans with no IRS reporting ever.
  • The death benefit is paid to beneficiaries triple tax free, most likely your grandchildren by the way!
  • The policy can be collateralized at any time, like when your child is buying a car or even purchasing a home.
  • In most states, the cash value of a juvenile life insurance policy is protected from creditors and lawsuits.

Please note that many insurers have requirements that parents and/or custodians own the same or several times the amount of life insurance coverage on themselves before polices will be issued.  The rationale is that the parent or breadwinner of the family has an insurable interest that supersedes the child’s need for coverage3.

[1] 2015 Guardian Life Insurance Company Quote.

[2] 2015 IRC Section 7702A is not includable in income because it is not treated as a distribution under IRC Section 72.

 

For more information or answers to your insurance questions, contact us at Allan Block Insurance Agency, www.ambins.com, located in Tarrytown, NY in the heart of Westchester County, a key business district near New York City.  We write auto, home, renters, condo, co-op, personal, business, life and group insurance for clients locally and in NYC, CT, NJ, PA, MA and many other states. The Professional Agency with the Personal Touch.