"Good parents," said Dr. Jonas Salk, developer of the polio vaccine, "give their children roots and wings." With a gift of permanent life insurance, parents and grandparents can do just that: provide the roots of financial stability and the wings of economic freedom that can help children soar toward their dreams.
So forget the latest hi-tech toy for your child, or giving adult children the most sophisticated culinary accessories. More and more, financially savvy parents and grandparents are giving a permanent life insurance policy as wedding gifts, graduation, and birthday presents and for just about any other meaningful family occasion. While a gift of life insurance may lack the immediate "wow" factor, its value can outlast any video game, computer, or even a brand new car. It's probably the only gift where you may receive two thank you notes, one now and a second one 15 years or so later, when the child is an adult and begins to appreciate the enduring value of life insurance.
Why?
Purchasing a life insurance policy on the life of a young person can help establish a foundation for a lifetime of financial security. The cash value or death benefit can also be used to help pay for college or college loans, for a down payment on a new home, or to take advantage of a potential business opportunity.* It is an equally appealing gift to give to a young married couple just starting out to help provide much needed permanent protection the couple may not be able to otherwise afford. As one New York Life client said, "As I got older, I saw the benefit of a permanent policy. I wish I had been able to buy this type of life insurance in my 20s or 30s. Now I can do that for my kids. It's a great feeling to know I helped to make them financially stable."
What exactly makes life insurance a great gift?
Life insurance offers a lifetime of protection and financial security: Whether it's a gift for a child or young adult, the policy can provide a lifetime of financial protection. As long as the premiums are paid, the policy can never be cancelled and when the child matures he/she may have the option to buy more protection at favorable rates. The policy you purchase for a son or daughter today can still be there years from now, providing death benefit protection for this child's own son, daughter, or spouse.
It’s a gift that will increase in value over time: A gift of permanent life insurance won't end up collecting dust in a few weeks. Every year the premiums are paid, the cash value in the policy grows. Depending on the size of the policy, it can have quite a substantial amount of money in it by the time the child reaches the age of 18, which can be used to help pay for college. Or the policy can continue to grow and the cash value could be used as the down payment on a first home. Buy it for a young adult, and the cash value can grow to be used for any number of purposes, including funding their children's education, or, if there is no longer a need for the full death benefit, partially funding their own retirement decades from now.*
The cash value grows on a tax favored basis: Under current law, cash values that accumulate in the policy are tax deferred. Even when cash values are borrowed through policy loans, there may be no tax consequences in many instances. Finally, proceeds received by beneficiaries are generally not taxable as income. Consult with your tax advisor for more details. Few gifts have so much versatility.
Now is always the best time to buy: Premiums for a life insurance policy are based on age, so whenever you buy, the premiums will never be lower. Of course, the younger the child is, the less you will pay in premiums. Also, buying now locks in the rate on a permanent policy at the insured's current age for life.
It protects the child’s future insurability: Once the policy has been issued, coverage cannot be canceled as long as all required premiums are paid. By purchasing a policy on a child or grandchild with a Policy Purchase Option (PPO), you can ensure that no matter what the health of that child is when they become an adult, he/she can obtain additional life insurance at affordable rates, with no evidence of insurability. In other words, no matter what the state of their future health, they will be able to buy life insurance and have at least some protection for their family. With a PPO, the insured has a right to purchase additional insurance at designated dates, regardless of insurability. That's quite a gift.
How the policy works
If the insured is a minor, the policy is owned by the purchasing adult until the child reaches the age of majority as defined by state law (with ownership transferred at a later date). The beneficiary is generally a guardian or parent. With adult insureds, the policy is generally owned outright by the insured, who selects the beneficiaries.
You have two choices regarding how premiums should be handled. First, you can take a lump sum (such as $10,000) that would otherwise be given as an outright gift to the child or grandchild; instead, purchase a single premium life insurance policy for whatever face amount that sum buys. The advantage is that no further premiums are required. (There are tax consequences associated with gifting amounts. You should consult with your own tax professional for tax advice.)
The second choice is to select the premium or death benefit desired. Then, make the scheduled premium payments. (Note that there may be gift tax consequences, since the premium is considered a gift to the insured. Consult your tax advisor before acting.)
