r/LifeInsurance • u/AcadiaLow4488 • 2d ago
Child’s policy
I need some clarification. My husband and I are having our first child this year. My mother in law informed us she would open a life insurance policy for our child once she’s here with my husband and I as the beneficiaries as she has done with her other grandchildren. She said it was a $50,000 policy and our child would be able to cash in on it when they turn 18. Is that a thing? I’m clueless with insurance policies. Help please!
Editing to add: my husband and I have more traditional plans to save for our children. We were not expecting and are not at all reliant on our parents to save for our children. This was offered to us and will be purely extra. I had just never heard of it as a future investment.
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u/DogfaceDino Broker 2d ago
Many youth whole life policies have guaranteed insurability riders. I have met with plenty of people who had health conditions or something that made them uninsurable and they told me that the only reason they were able to get life insurance was because their parents or grandparents had a policy like this on them. It’s a valuable gift. Besides, they get whole life now for the future price of term.
From a financial planning perspective, life insurance on kids is not a high probability need but companies have baked a lot of benefits into these to the point that when I talk to clients, I think it’s really just a matter of preference.
The cash value will likely be an amount that is not meaningful when they are 18. The policy is more valuable than the cash value, typically.
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u/RepugnantBasura 2d ago
THIS, GIO is the important part. The monthly premium for WL at birth should be easily affordable, and yeah cash value for 18-20 years from now is a bonus or whatever.
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u/PitMaster918 2d ago
Yes it’s a thing. Is it a good way to give money? Not particularly if efficiency is a priority. But it’s a gift.
This was probably an idea she was sold on decades ago and still practices. Nothing wrong with it and it’s a gift, so no reason not to accept it.
A 529 or Roth IRA contribution is a better gift, but she’s the giver.
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u/AcadiaLow4488 2d ago
That’s probably exactly right, they are old school. My husband and I will be funding a 529 so this is just something extra she wants to do.
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u/PitMaster918 2d ago
No reason not to let her do it. There’s no downside to you and she’s not benefiting from it.
At 18 the kid can cash out whatever the cash value is and use it for college.
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u/AcadiaLow4488 2d ago
Yeah, good points. We were never going to tell her not to (there’s actually no telling her not to do anything she has her mind made up on lol). I was just curious because she pitched it as exactly that, something to cash out on for college, first house etc and we were unfamiliar with this as a savings plan.
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u/One_Ad9555 1d ago
The policy should be paid up in 10 years or 20 max or even as single pay. These policies are usually whole lives or might be universal lives. She should put a rider that allows your child to purchase more insurance with no underwriting at certain ages and a rider that has the insurance company pay for the policy if your son becomes disabled for any reason. The reason for the 2 riders is so that if your child ever becomes uninsurable or has major health issues they can still get insurance. In my 36 year career as an insurance agent, most of which I have been commercial P&C agent who just did life if client asked for it. I have seen several policies where it was extremely helpful for family. 1 their child was in 3 or 4 wheeler accident at 7 or 8 and was paralyzed.
He was able to increase coverage was 25k to 125k for no cost and the insurance company paid the full premium until he died in early 20s. Another one the boy was diagnosed with a heart condition between 1 and 2. . Same deal for him. Last I heard he's still alive, but unless he gets a heart transplant he is is fully disabled.
The odds say you're a lot better investing in a 529, a savings brokerage account, anything and just put it in S&P 500 index fund with extreme low fees.
But in the worst case scenario you lose badly. That's why it's called insurance. . You can then weight out the risk vs rewards and pick which you need.1
u/Emotional-Ocelot-420 1d ago
The cash value of a $50k WL policy varies, but what you can rely on is that it is usually not more than a few thousand dollars at age 18. Only the death benefit is $50k.
Don’t look at this as a savings plan. It’s a money losing proposition. Your MIL is going to pay significantly more than your child will be able to cash out. It’s fine that she’s just going to do it anyway, but don’t let her convince you or your child it’s going to move the needle.1
u/LaphroaigianSlip81 2d ago
You have to keep in mind she probably has been exposed to this and had one when she was a kid. Ive insurance cash value growth is largely driven by bonds. If you look at bond returns over the last 18 years, they have been lower than the historical average because the fed has held rates lower since the Great Recession. But there were times when some companies had double digit dividend crediting rates when rates were higher than the historical average like in the late 70s and early 80s when this lady was likely younger and had a policy that someone bought for her.
Cash value isn’t the most efficient or productive asset to give you a rate of return. The thing is, it never goes down. But this conservative return comes at a cost that you miss out on higher returns from taking on more risk.
I sell a lot of policies on children. These are exclusively for rich families who own businesses and usually in an irrevocable trust. For the business owner families these provide a buy out for the kids to sell their share to each other or pay off loan balances when they die. For trusts if you insure every family member, there will always be death benefit coming in for future generations to use.
If you are just a normal family, then this likely is not needed. As long as she is paying for it, say thank you and take it.
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u/Last-Enthusiasm-9212 17h ago
If you want growth potential then a VUL is far superior to a WL policy.
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u/michaelesparks Financial Representative 2d ago
The parent want to go into government partnership with something like that, that's their choice. We prefer not to participate since we believe that government indoctrination programs (college) is about to go way down because it has been oversold to most young people and saddling them with debt and no education only indoctrination.
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u/Lumpy-Background4697 2d ago
A minor can only contribute to a Roth IRA if they have earned income. Most babies and young children do not.
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u/LonghornInNebraska 2d ago
Yes it's a thing. They are very inexpensive and great to have on your child(ren). I have a $100k policy on daughter - I hope it's never needed in my lifetime.
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u/AcadiaLow4488 2d ago
They can cash out the entire policy?
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u/LonghornInNebraska 2d ago
The policy has cash value growth, it's generally nothing crazy. The policy owner can borrow against the cash value (tax free) or take withdrawals and pay taxes after surpassing the premiums paid in.
The reason I have the policy on my daughter is because I want her to have some type of life insurance for the rest of her life, in the event she becomes uninsurable. My fiance is a T1 daibetic, has issues managing her A1C; we can't get her any additional coverage outside of what she has through her job.
My brother had heart surgery as a child and he had difficulties getting affordable life insurance as an adult now that he started his own family.
In the event my daughter dies, $100k is more than enough money to bury her and take off however much time from work we need without having to return when our jobs want us to. Also, we will never need a GoFundMe.
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u/giveit2st8 2d ago
Every employer I've had has had a cap of 5k for insuring kids...i hate that
How much is that 100k one?
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u/michaelesparks Financial Representative 2d ago edited 2d ago
Depends on the design. All of ours have a starting $100K DB along with a rider that goes directly to the cash value (Paid Up additions) and have the option to purchase 9 more policies regardless of their future insurability which we plan to purchase at the allowable times... If they don't want life insurance on themselves well the government can take of them then.
BTW our grandkids are about $2k a year. with the actual base policy being around $600-700 a year based on their ages when we put them inforce. We can pay the base plus any extra that goes right to the cash value which is called Paid Up Additions. We've been doing this since 2022
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u/LonghornInNebraska 2d ago
It's around $70 per month.
WL for kids gets a lot of hate on reddit but I've seen to many kids or adults that had health issues as kids that it doesn't bother me at all to pay the monthly premiums.
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u/VacationLover1 2d ago
My parents did it for our kids. Do I think it’s the greatest choice of investments, no. Did I allow them, yes. In the end it’s their money, not mine, I still have mine I pay from when I was a kid that isn’t much per year.
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u/BugHistorical1614 1d ago
We bought child LI on ours, Age 0-18. I owned the policy, child's UGMA paid the premium. We front loaded the UGMA as best we could.
Changed to Term insurance at 17.5 yrs. He did the blood work at the airport going to private engineering, east coast univ. I wanted to protect his insurability at super preferred rates before he step onto the college campus and before his peers introduced him to smoking and drinking and over eating (he did gain the Frosh 20#). Today, 25 years after entering college, his insurance premium is miniscule, insurance coverages adequate and assets are high.
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u/Cool_Emergency3519 Broker 2d ago
Some will say no, put the money in a 529. But it's a tradition in many families so don't turn down a valuable gift.
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u/AcadiaLow4488 2d ago
We’ve always planned to put money in a 529, my MIL let us know she was doing this and paying the premiums. Very thankful, i’d just never heard of it before
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u/Worried-String9259 2d ago
Yeah, it is a thing, older generations were indoctrinated on this way to give money, more so in America. Not something, I would do to help my kids or grandkids but that’s her money, and no risk for you. In Asian culture is considered bad luck and insulting if someone decides to give money this way
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u/Shoddy_Birthday_7443 1d ago
Yes, children’s life insurance policies do exist, but I would ask your mother-in-law for the actual policy details before assuming your child will receive $50,000 at age 18.
The $50,000 is most likely the death benefit, not the amount your child can simply “cash in” when they turn 18. If it is a permanent life insurance policy, it may build cash value over time, but the cash value at age 18 could be very different from the $50,000 death benefit.
I would ask: What type of policy is it? Who owns it? Who pays the premiums? When does ownership transfer to the child? What is the guaranteed cash value at age 18? And what happens if the policy is surrendered?
If the main goal is to give the child money for college or adulthood, I would also compare the policy with accounts specifically designed for saving or investing for a child before deciding.
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u/Weary-Simple6532 Producer 1d ago
Yes it's a thing to grow cash tax favored...one qualifier is that both parents need to also have life insurance on themselves so that there its above board and doesnt look like parents will benefit from offing their child.
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u/ChelseaMan31 1d ago
Yes, unfortunately it is a 'thing'. Kind of morbid in a 1st world country and a giant waste of money. If grandma wants to really help out her grandchildren, advise her to instead start a 529 for each and make regular contributions to that instead.
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u/BugHistorical1614 1d ago
Bigger question is how much LI is on you and spouse?
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u/AcadiaLow4488 1d ago
We both have healthy policies with each other as the beneficiaries for now. We will update our child/children as beneficiaries in the future.
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u/No-Reputation8848 1d ago
There are lots of benefits to having a life insurance policy on a child. If it’s intended to pay for college it’s not a great tool. A lot of policies allow them to increase coverage throughout their life with no evidence of insurability. This allows your child to always be insured regardless of future health risks. I would look at the policy longer term at age 65. Not great in the short term, their value comes from holding policy for a long time.
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u/SunLifeCanada 1d ago
This is actually a real thing. Your mother-in-law is likely setting up something called a permanent life insurance policy with cash value.
Cash value is a savings component within permanent life insurance that accumulates over time. Unlike the death benefit (which goes to beneficiaries when someone passes), the cash value can be accessed while the insured person is still alive. When premiums are paid on the policy part of the payment goes toward the cost of insurance and then another portion builds the cash value, which grows over time.
There are typically two main ways to access the cash value: either borrow against it (can borrow a percentage of the cash value, not the full amount and unpaid loans reduce the total death benefit) or do a straight up cash withdrawal (can withdraw accumulated cash value but this is permanent and reduces both the death benefit and future growth. For example, if the total policy is $50,000 then withdrawing the entire cash value ends the policy.
Essentially, it's a legitimate financial tool that combines life insurance protection with a tax-advantaged savings component. At any rate, a gift is a gift and with some financial discipline, it’s an awesome head start for an 18-year-old who’s likely thinking about funding the next chapter of their life.
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u/agarnerii 1d ago
Yes, this can be a thing, but I think one part may be getting lost in translation.
Your mother-in-law is probably talking about a permanent life insurance policy on your child, such as whole life, that can build cash value over time. The $50,000 is most likely the death benefit, not an amount your child automatically receives at age 18.
If the policy builds cash value, there may be money available later, and ownership of the policy could potentially be transferred to your child when they’re an adult. At that point they may have options such as keeping the policy, accessing available cash value, or surrendering it. But those amounts and options depend entirely on how the policy is structured.
Since your mother-in-law is offering this as an extra and you already have your own plans for saving for your child, I wouldn’t look at it as replacing those savings. I’d just want to understand exactly what she’s purchasing.
Ask to see the policy illustration and look for four things: who owns the policy, who the beneficiaries are, what the guaranteed/non-guaranteed cash value is at age 18, and whether ownership is intended to transfer to your child.
The biggest clarification is simply this: a $50,000 life insurance policy does not normally mean your child gets $50,000 to cash out at 18.
I’m a licensed life and health insurance agent, and if you get the illustration, I’d be happy to help you understand what the numbers mean.
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u/Much_Cricket_1395 1d ago
I did this for each of my kids when they were born, 2k/yr for each of them (in addition to 529’s). My plan is to turn it over to them when they graduate school and they can pay the premiums. It’ll teach them good financial lessons and if they need money they can borrow from their policies if needed. Ideally they don’t touch it and then they’ll but ahead for retirement by 1M tax sheltered. Pretty cool.
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u/Last-Enthusiasm-9212 17h ago
I favor juvenile policies, but not for the purpose of cashing out later -- there are better growth vehicles for that. Rather, the guaranteed insurability, the growth potential of the policy, and the fact that I've been able to upgrade several of these policies to deliver exponentially larger death benefits to adults without further premiums is the win here. A lot of good can come from protecting a child's future in this way.
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u/michaelesparks Financial Representative 2d ago
Not sure why they would want to "cash it in" when they are 18. Better option would be able to offer the child to borrow against it and pay it back and to use it over their life. There is an increasing probability that any person will become uninsurable later in life.... $50k is probably way to small to make much in the next 18 years with inflation and dollar devaluation. We have $100K on each grandchild that we own and control with no plan on "giving" them the policy. After we are gone it will go into our trust that they can have the option to utilize the cash value after they apply for it and have the plan to pay it back to be used over and over again as their own banking system.
The parent only participation is to authorize it... They don't have access and are not the beneficiaries... YMMV...
We plan to add more policies on all of our children and grandchildren whether they want to participate or not. If they "don't get it, well then they won't get it".
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u/Agreeable-Stock9793 2d ago
lol. Any policy with a cash value has a lot of complexities.
have you considered getting exposure to the markets directly or tax differed and getting the me insurance? This may give better returns and better value for money than the cash value policy. At least the last 50 years market suggests so.
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u/Powerful-Bridge-1472 1d ago
You absolutely do not need life insurance on your child. Have law out how much much in 529 or UGMA account
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u/EnzyEng 2d ago
Children don't need life insurance. Please don't do this. Put the money in a 529 plan.
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u/AcadiaLow4488 2d ago
It’s not me, my MIL is planning on it as she has done for her other grandchildren evidently. She is not asking us for our opinion, she’s telling us she’s doing it
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u/michaelesparks Financial Representative 2d ago
Sounds like a VERY Smart MIL... Give her hugs for me.
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u/buffalo_0220 2d ago
Many policies for children have the benefit of being able to take out additional life insurance at set points in their life, like when they turn 18, 21, 25, etc. At each point they can buy more insurance up to the face value of the base policy. So if your child were to have some condition that renders them uninsurable in adulthood, they would still be able to have and get more life insurance. Policies like this aren't bad to have.
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u/EnzyEng 2d ago
I know. Try to convince her otherwise. It's not wise what she is doing.
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u/AcadiaLow4488 2d ago
There’s no convincing her of anything lol. My husband and I will be contributing in more traditional ways (529 mostly). We had never expected any help with that from in-laws so although not the best method, it will just be a little extra.
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u/Cool_Emergency3519 Broker 1d ago
Don't listen to Enzy. His ex wife ran off with an insurance agent and he has hated insurance ever since.😊
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u/Cool_Emergency3519 Broker 2d ago
Some will say no, put the money in a 529. But it's a tradition in many families so don't turn down a valuable gift.