What happens to life insurance bought for children when they become adults?

Two adult cargivers giving teenager a hug

For many millennials, childhood life insurance purchased by their parents and grandparents is an untapped asset. In many cases, life insurance hasn’t been purchased as protection but as an investment vehicle. But how do you take ownership as an adult of an insurance policy purchased when you were a child? And what does ownership of that policy mean for your finances? Let’s explore why people buy life insurance for young children and how you can take ownership of your life insurance policy as an adult.

Why should I buy life insurance for my child?

If you’re considering buying life insurance for your children or are a grandparent buying life insurance, you’re probably doing it for a couple of reasons. You’re either looking to:

  • Preserve the ability of your child or grandchild to buy insurance later on
  • Provide protection for your family in case something happens to your child or grandchild
  • Use it as an investment opportunity

It can help preserve insurability.

Child life insurance often comes with a guaranteed purchase option. This lets you buy a specific amount of life insurance coverage at a locked-in health rating later on. What this means for your child is that they can buy additional coverage without undergoing a medical exam. Child life insurance tends to have modest policy limits, so you probably won’t be able to take out a million dollar policy on your child.

Additional coverage availability does vary depending on your age and life events. The primary reason for buying life insurance so early is to avoid the risk of not being able to purchase it when the child is older due to a preexisting health condition (diabetes, heart conditions). These health issues often impact both cost and insurability, which makes circumventing them important. 

It locks in coverage at a lower premium.

As long as the policyholder continues to pay the life insurance premiums, they won’t go up for the length of the policy. This is important because life insurance rates tend to get more expensive as you grow older.

It can help provide a modest nest egg.

Unlike with term life insurance coverage, whole life insurance for children accrues a cash value as you continue to pay the premiums. This cash value can be borrowed against or, upon adulthood, be received as a lump sum upon surrender of the life insurance policy. This cash value can be used to help cover school tuition or as a down payment on a home or vehicle. In addition, the money in the account is tax-deferred; you won’t pay taxes on the gains until after the cash is withdrawn.

It covers costs if the worst happens.

No one wants to think about the death of a child, but this painful experience could cause unexpected costs. Child life insurance will still pay out the lump sum and it can be used for expenses such as burial costs and grief counseling or therapy. It can also help supplement income if you need to take time off to grieve if you own your own business or your company’s bereavement leave policy isn’t enough.

How to Claim Ownership Over Your Life Insurance Policy

Let’s assume you have lived a healthy life up to this point and you’re now old enough to ask about the whole life insurance policy purchased for you as a child. Despite being a legal adult, your life insurance is not yet technically yours. 

  1. Ask your parents or grandparents to transfer ownership of your life insurance policy to you.
  2. Ensure you’re granted full ownership of the policy. There’s a difference between asking your parents or grandparents to make you a payer versus granting you full ownership. If they make you a payer, you still won’t have full control over the insurance policy.
  1. Request an “in force illustration” from the insurance company. This document lays out exactly where you stand with the policy’s cash value and any options you have for managing it. 
  1. Take this illustration to a fee-only advisor who can explain it to you and use your existing investment portfolio to suggest best options moving forward.
  1. Decide to keep the policy in force while changing your beneficiary or beneficiaries. But more likely than not, you’ll probably want to liquidate the policy and use the cash value to fuel other investments or to pay off a chunk of debt.

SelectQuote Can Help Answer Your Questions About Life Insurance for Children

Whether you’re looking into purchasing life insurance for children or grandchildren or you’re an adult with questions about term or whole life insurance, SelectQuote can help. We can help you save money on life insurance for your whole family, not just your children, by comparing rates and policies from several trusted insurance companies to find the right fit for you. 

We do the shopping. You do the saving.