Can Grandparents Get Life Insurance on Grandchildren?

Grandparents often consider purchasing life insurance for their grandchildren as a thoughtful way to contribute to their future financial security. Understanding the core requirements and available policy types can clarify the process. This article explores the considerations involved in securing a life insurance policy for a grandchild.

Understanding Insurable Interest

A fundamental principle in life insurance is “insurable interest.” This means the policy owner must stand to suffer a financial or emotional loss upon the insured’s death, preventing speculative use. For grandparents, establishing insurable interest in a grandchild is generally recognized due to the close familial relationship. Many states acknowledge the inherent love and affection between grandparents and grandchildren as sufficient, even without direct financial dependency.

However, specific interpretations and requirements for insurable interest vary by state law. While some states broadly accept the grandparent-grandchild relationship, others might require a more explicit demonstration of potential financial hardship or a direct financial stake. For example, if a grandparent is the primary caregiver or contributes significantly to the grandchild’s financial support, this establishes a financial interest. Insurable interest must exist at the time of purchase, but it does not need to continue for the life of the policy. Without valid insurable interest, an insurance contract is void.

Policy Ownership and Beneficiary Designations

When a grandparent purchases life insurance for a grandchild, the grandparent becomes the policy owner. As the owner, the grandparent controls the policy, including the right to make changes, access any accumulated cash value, and designate beneficiaries. Minors cannot legally own life insurance policies due to their inability to enter into binding contracts. Ownership remains with the grandparent until the grandchild reaches the age of majority, usually 18 or 21, at which point the policy can be transferred.

While a minor can be named as a beneficiary, it is not recommended to name them directly. Insurance companies cannot pay death benefits directly to minors, which would necessitate court involvement to appoint a legal guardian or custodian. To avoid these complications, grandparents often name an adult, such as the grandchild’s parent, or establish a trust for the grandchild’s benefit. A trust allows the grandparent to set specific terms for how and when the funds are disbursed, ensuring the money is managed according to their wishes.

Common Policy Types for Minors

Life insurance policies for minors are most commonly structured as whole life insurance. This permanent life insurance provides coverage for the insured’s entire life, as long as premiums are paid. A key feature of whole life policies is their cash value component, which grows tax-deferred over time. This cash value can be accessed later in life through withdrawals or loans, potentially providing funds for education, a home down payment, or other significant life events. Premiums for whole life policies purchased for children are lower and remain level throughout the policy’s duration, locking in an affordable rate from a young age.

While term life insurance is available, it is less common for minors. Term policies provide coverage for a specific period and do not build cash value. Although some term policies offer conversion options to permanent coverage, the primary benefit of a whole life policy for a child lies in its lifelong coverage, guaranteed insurability, and cash value accumulation.

Steps to Secure a Policy

Securing a life insurance policy for a grandchild involves several steps, assuming insurable interest has been established. The process begins with selecting an insurer that offers juvenile life insurance policies. Grandparents will need to provide basic information about the grandchild, such as their full name and date of birth. Parental consent is often required, particularly if the grandparent is not the grandchild’s legal guardian. Some insurers may require the parents to have an active life insurance policy.

The application process involves answering a few health-related questions about the grandchild, but full medical exams are not required for children. Underwriting guidelines may include considerations such as parental lifestyle issues. Once the application is submitted and approved, the policy is issued, and the grandparent, as the owner, begins paying the premiums.