The best time to buy life insurance is when you’re young and healthy, as the cost of your insurance will never be lower. Unfortunately, young people often don’t have the money to buy insurance. When someone is graduating from high school or college, or getting married, this is a great opportunity for a parent or a grandparent to purchase life insurance on the individual.
There are some great benefits to giving the gift of life insurance to a child or grandchild:
- It can lock in their insurability, hedging against unforeseen health issues that might prevent them from getting life insurance later in life.
- It starts building cash value early on, and starting younger gives the money that much more time to compound. This larger cash value might come in handy when it comes time for your child or grandchild to buy that first house, put kids through college, or even retire.
- It locks in lower premiums. It’s much cheaper to buy life insurance when you’re young and healthy. Covering those first few years of premiums for a child or grandchild can help them take advantage of these lower premiums.
- It instills a sense of responsibility. This is why life insurance makes a tremendous wedding gift, as getting married is the gateway to a world of larger responsibilities — a mortgage, a spouse, and children. Yet studies show that up to 23 percent of families with children under 18 have no life insurance. Even for those that have insurance, there is a concern that they might not have enough.
- It provides a death benefit. In an era when students are graduating with an average of $33,000 of student debt, to say nothing of credit card debts and rental agreements on apartments, young people may have a surprisingly large amount of final expenses.
Of course, buying life insurance is a big decision, and there are some things to be considered:
- How much insurance to buy. This is something that really depends on the facts and circumstances around the gift. Most parents or grandparents gift a small amount of insurance, maybe $100,000 or so. It provides a good foundation of immediate protection, but it leaves room for the insured to add more protection as income, assets, and responsibilities grow.
- Long-term affordability. Unless the premiums are going to be gifted in perpetuity, at some point the child or grandchild is going to have to take over the responsibility of paying the premiums, and they need to be able to have the means to assume that responsibility.
- Who owns the insurance? Ultimately, the child or grandchild should own the policy, but many times the policy starts off being owned by the person who gives it, who later transfers it over to the insured.
- The tax implications of the gift. It is considered a gift when the ownership of a life insurance policy gets transferred to the insured. If the policy is owned by the insured and the premium is being paid by someone else (the parent for example), it is considered a gift too. The amount of the gift depends upon the value of the policy when it is transferred. Gift taxes may be avoided if the amount is under the annual gift limit ($15,000 per person annually so a couple could give $30,000 per year in 2020) or does not exceed the person’s lifetime gifting amount. Consult your tax advisor for details.
Giving life insurance as a gift is a time-honored tradition, one that many families have carried on from generation to generation. Maybe it’s time to start a new tradition in your family.
This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.