How Much Life Insurance for My Grandchildren Should I Buy?

Wondering about life insurance for grandchildren?

You’ve probably heard it’s a way to:

Support your grandkids
Help pay for college, even after you’re gone
Or a way to help your adult children if the unthinkable happens

Chances are pretty good you’ve got questions about life insurance for grandchildren.

Right? Don’t worry. We’ll answer your questions here.

And probably address a few things about life insurance for grandchildren you haven’t thought of.

The simple definition of life insurance for grandchildren

Here’s the elevator pitch about life insurance for grandchildren:

It’s a type of protection offered through insurance companies in exchange for paid premiums.

You pay a monthly premium. And if your grandchild dies, your insurance policy pays out a cash benefit.
About 9,100 children die each year in the United States. The leading causes include accidents, health problems, and suicide, according to the Centers for Disease Control and Prevention.¹

Traditionally, life insurance for adults is purchased to protect the survivors from the loss of income of the deceased.

But while life insurance for grandchildren does provide a cash benefit upon death, it is more often bought with different intentions in mind.

The three-party rule to get life insurance for grandchildren

The big question on your mind and the reason you’re here: can I buy life insurance for grandchildren?

The answer: Yes, if you follow the three-party rule.

A person is able to buy life insurance for another person, be it a spouse, parent, child or grandchild, as long as they can demonstrate insurable interest.

There are 3 parties involved in an insurance contract:

The insured person (the person whose life is being insured)
The beneficiary (the person who will receive the benefit when the insured person passes away), and…
The policy owner (the person who owns, controls and pays for the policy)

What does insurable interest mean?

Insurable interest means the people involved (you and your grandchild) must have a relationship and the insured person must consent to having the policy.²

In the case of a minor, a grandparent wanting to buy life insurance for grandchildren would simply need to demonstrate cause.

Here are a couple of examples most often used to demonstrate cause:

Example 1: If the grandparent were to suffer emotional or financial consequences as a result of the child’s passing.
Example 2. If the grandparent is looking to use the policy as a financial tool to help pay for college or another monetary commitment.

Understand the policy details of life insurance for grandchildren

Like any policy, contract or agreement, there’s going to be some details you need to understand and agree to. When it comes to life insurance for grandchildren, there’s three main areas to be familiar with:

Limitations
Requirements
Medical underwriting

Limitations

How much money does your grandchild make? Income replacement is one of the most common factors used to determine the face value of a life insurance policy.

Usually, children don’t have an income. And that means there are limits as to how much life insurance can be taken on a child.

Many insurance carriers limit life insurance for children to $50,000 or $75,000.3
Insurance is generally evaluated on a case-by-case basis depending on the need and purpose that is demonstrated.
While there is no fixed number for the benefit amount, the ceiling is often lower for a child than an adult due to the human life value, or lack of earning power a child has.⁴

Requirements

What do you need to get life insurance for grandchildren?

It’s pretty simple. Usually, grandparents only need to provide basic information, such as:

Social Security number and address of the child
Each state has different requirements, and some ask for the consent or signature of a parent before taking out a policy on a child.
For this reason, it may be a good idea to seek permission from a parent before starting the process.

Medical underwriting

Generally, there is not much medical underwriting involved in a life insurance policy for grandchildren.

Usually children do not have to undergo a physical exam if they were born healthy and remain so. But the parent or guardian may be required to answer some questions about the child’s health and family medical history.

Purchasing life insurance for a child or grandchild, also gives you the option to purchase even more insurance later in life without proof of insurability.⁵

6 reasons to buy life insurance for grandchildren

Should you buy life insurance for grandchildren? That’s a good conversation to have with your family, and your adult children. There are many different factors to think about.

Here are six reasons life insurance for grandchildren makes sense.

1. High value at relatively low cost

Children are generally young and in good health. This works in their favor when it comes to gaining affordable insurance coverage.

Why?

Buying life insurance for grandchildren now means that you are guaranteeing these low-cost premiums for life if you select a whole life insurance policy.

The younger the child is at the time of the purchase, the lower the premium is likely to be.

2. Long-term security

We lose our insurability as we age.

That means securing life insurance at an early age guarantees long-term security for your grandchild.

What if your grandchild develops a disability or chronic illness?

It can hurt their chances of gaining life insurance at an affordable rate. In some cases, it can prevent them from ever acquiring it.

3. Steady growth

A permanent life insurance policy will not only provide a death benefit, but it can earn cash value as well.⁵

How does a cash-value or permanent life insurance policy work?

The cash value of a permanent life insurance policy will grow with your grandchild and increase over time.
This is money they can borrow against later in life for college, buy a house or to use toward a business venture. And generally, this money is tax deferred.

Think about life insurance for grandkids this way:

Do you want to give your grandkids a toy that could be broken in three weeks, clothes that will be out grown in three months?
Or something that could remind them of your love three decades from now?

4. Financial head start

Chances are pretty good you’ve heard of people giving their grandchildren life insurance as a gift. Let’s be honest, to a kid, it probably seems underwhelming.

But the gift of life insurance for grandchildren can last them a lifetime, and benefit them long after you’re gone.

In a recent survey among seniors, financial security was among the top 10 things they value most.⁶
Think about it this way: gifting life insurance to your grandchildren is a way you can demonstrate financial responsibility and leave them a legacy.
The gift of life insurance can be given up to $17,000 per child without any federal gift tax liability for the 2023 tax year.⁷

Avoiding gift taxes

If you are concerned about being responsible for gift taxes, then you may want to restrict the benefit amount.

Gift taxes do not apply until the policy is passed on to the parent or grandchild.
But when the transfer happens, if the face value of the policy is greater than $17,000, you will be responsible for paying taxes.

5. Provide financial support

Did you know 2.7 million grandparents in the U.S. act as legal guardians to a grandchild?⁸

If you’re a legal guardian for your grandchildren, life insurance may provide financial support in certain situations.
If your dependent were to become chronically ill, a life insurance policy could help offset treatment costs and avoid medical debt from accruing as a result of their illness.

Many life insurance policies feature accelerated benefits that can help during a time of crisis.

6. The unthinkable

No one wants to believe that anything bad will happen to the ones they love, but life is unpredictable and unexpected things can and do happen.

Be prepared

Probably one of the best ways to combat life’s tragic moments is to have a feeling of preparedness.

While protection won’t ease your emotional burden, it can help with the financial one.

Cover final expenses

Parents are often emotionally and financially unprepared for the death of a child.

Having a life insurance policy for your grandchildren can provide some comfort to an adult child dealing with the cost of final expenses.

Can life insurance help pay for college?

A popular use for permanent life insurance for grandchildren is to help with tuition costs.

The cash value of an insurance policy for grandchildren can be borrowed against to help with any:

Rooming
Books
Tuition costs of attending school

If your grandchild decides he or she wants to pursue a different career or type of schooling, cash value can be borrowed against for any reason.

It does not carry the common stipulations and limits of other types of college savings options.

How to gift life insurance for grandchildren

You can transfer ownership of a life insurance policy to your grandchild once he or she reaches adulthood.

This can happen at 18, or up until the age of 25 is common.

If you were to pass before your grandchildren reach the age of majority, the child’s parents could continue the insurance in their name instead of yours.⁹

3 factors to determine life insurance amount for grandchildren

How much life insurance to buy is a personal decision. The correct amount really depends on the facts and circumstances surrounding your purchase.

To know what is the right amount of life insurance to buy for your grandchildren, you must identify the reasons for making the purchase in the first place.

These THREE steps will help you determine the right amount:

1. Define the purpose

Is your intention to have protection for yourself and cover expenses regarding your grandchild as a dependent?

If so, then your main goal is likely to be buying just enough coverage to handle final expenses and any related medical bills.

This can generally be done with a relatively small cash benefit of $10,000 to $25,000.

2. Long-term affordability

If your goal is to give a gift of life insurance to your grandchild, then you have other considerations to make, such as:

Will the life insurance policy provide long-term value?
Does the insurance carrier have limitations on life insurance for children?
If the policy is transferrable, what impact will that have on the child who acquires the policy?

3. Premium affordability later

Unless the premiums are going to be transferred to a parent or someone other than your grandchild, at some point your grandchild is going to have to assume the responsibility of paying them.

Lots of life insurance policies are left to lapse.

An inability to pay the premiums is a major reason why.

For this reason, you want to be sure you select a coverage amount that has premiums your grandchild will be able to maintain.

Find life insurance for grandchildren: here’s how…

Ready to get a life insurance policy for your grandchildren or have more questions?

Call (800) 827-9990 today to get a quote from a licensed insurance agent. Or visit us online to find an agent in your area.