While it is very common to own life insurance on a spouse or partner, people often frown upon the idea of owning life insurance on their children. Because most people do not rely on their children for financial support, you might question why anyone would want insurance on their child’s life. To most people in our society, there is something morally wrong with a parent receiving any financial benefit from the death of his offspring. A parent who owns life insurance on his adult child may even be seen as having improper motives.
In spite of our distaste for the concept of a parent insuring a child’s life, there are several legitimate reasons why parents may want to make sure their adult child has life insurance or purchase such insurance directly. Parents who arrange this type of insurance often do so on the advice of an experienced financial planner.Although it is almost impossible to think about losing your child, advance planning for these types of events is part of protecting your family and making sure you don't have to rely on others to pay for your own care.
Relying on Your Adult Child to Pay Premiums
While you may believe your adult child is setting aside funds for emergencies and paying for life insurance to provide for his or her dependents and other financial obligations, you may be surprised and find the opposite is true. Too often, we only discover the true nature of a loved one's finances after they die. See
debts of deceased. Many parents are faced with crippling expenses for the care of their grandchildren or debts left behind by a deceased child, just at the time their own income has decreased due to retirement. In today's bad economy, more parents are watching their children struggle financially. Unless you are paying the premiums yourself, don't assume your adult child has sufficient life insurance to protect you from these kinds of events.
See Life Insurance as a Gift.
Reasons for Life Insurance on Children
1. If your adult child dies leaving dependents, such as your grandchildren, you may be unable to provide a home for them or pay their educational and medical expenses, without the benefit of life insurance.2. If your son or daughter dies without sufficient assets to pay funeral and burial expenses, you may be unable to provide a suitable funeral and burial for your child without life insurance. Life insurance can make the difference in whether your child's last wishes are honored.3. If your adult child has a dependent spouse or partner, life insurance proceeds may allow your child’s survivors to keep the family home, a small business or cherished pets. Without life insurance, you may end up having to take on these obligations.4. Life insurance proceeds may be needed to pay medical bills and other debts owed by your adult child at death. These types of creditor claims might otherwise threaten your family’s financial security. Adult children with drug or alcohol problems are just one example of how these types of debts often arise. See
Living Trust for Child with Drug Problem.5. If someone in your family has to quit a job or reduce work hours to care for a grandchild, an elderly parent or other dependents after the death of one of your children, life insurance proceeds may replace lost income.
6. If you or someone in your family relies on your son or daughter as a caregiver, you may need to pay someone else to provide these services. Life insurance proceeds may be used to pay a third party to provide home health care or nursing home care that may be needed in the absence of your adult child.7. Life insurance could provide the funds necessary to pay legal fees and costs associated with probate or other legal expenses arising from a death in the family. Even if the estate contains assets sufficient to pay such expenses, they may not be liquid. Life insurance proceeds can avoid having to sell property to cover fees that must be paid immediately.
8. If your child is stricken with a terminal illness, a life insurance policy could provide the necessary funds to pay for end of life care or the cost of expensive medical treatments for your child.
Steps to Take When Insuring Your Children
If you want to ensure your adult child has sufficient life insurance, talk with a financial planner about the best way to arrange it. If your child does not have an existing policy and is an adult when the policy is purchased, the insurance company may require your child to submit to a medical exam and sign the insurance application.Consult an estate planning lawyer about how the life insurance should be owned, whom should be named as beneficiaries of the policy, and whether any trusts should be used. Life insurance is an asset that can increase estate taxes on some estates. In addition, if you want to control how the proceeds of the policy may be used, such as for the education and support of your grandchildren, it is very important to have legal advice regarding naming beneficiaries on the policy and how ownership of the policy should be structured. See
Life Insurance Trust.If the policy is going to be owned by your adult child, you may want to make arrangements to pay the premiums directly so you can ensure the policy remains in force. If you plan to pay the policy premiums as a gift, discuss the ramifications of gifting and annual gift tax exemption amounts with your financial planner.There are many different ways to structure ownership of life insurance. Some are more tax efficient than others. The best way to arrange life insurance on an adult child depends on your unique circumstances and
estate planning goals. A life insurance agent may be focused on selling you a policy quickly, without examining the best way to fit this type of insurance into your family’s financial plan. Start by consulting a financial planner or estate planning attorney to understand your options. To continue, see our free
Estate Planning Guide for Parents.