In the first part of this article, I discussed the importance of a critical illness insurance policy for your children and your family’s financial well-being. This article will explain the importance of life insurance and how it differs from a critical illness policy.
The goals of each policy are different. The likelihood of a child’s premature death is less likely to occur than a serious illness. Therefore, the goal of life insurance for a child can be two-fold. First and foremost, the goal of life insurance for your child is to protect their insurability. Insurability is simply the ability to get insured. If your child does get ill, not necessarily a serious illness, it may cause your child to no longer be eligible for insurance coverage later in life.
Life insurance can provide financial security and a safety net for a lot of issues. For this reason, I discuss this first as I feel it is the most important issue to be resolved. No one wants to receive this money and would much prefer to gift the policy or the cash value in the policy to their children. For this reason, most insurance companies have limitations on how much insurance parents can purchase for their children based on their parent’s own life insurance coverage.
The second use of life insurance for children is as an estate and/or wealth transfer. This is a complicated strategy and must be used for the correct reasons and correct people. One way this can be done is when grandparents would like to provide financial security for their grandchildren. The grandparents take out life insurance on their adult children. The parents of the children are the insured and contingent owners in the event the grandparents die and this, without tax consequences. The grandchild is the beneficiary of the policy.
Here is an example. Grandfather John purchases a life insurance for his son John junior. John junior is the person insured as well as being the owner of the policy in the event John senior passes. Little Johnny is the person who will receive the money. John Senior paid for the policy, John junior used his health, and age to get the life insurance to provide tax differed growth. While Little Johnny does not know it, he will have a substantial life insurance and cash component that Little Johnny can use to purchase a house or achieve any of the other life goals he has. There are many ways for Little Johnny to use and prosper from this.