Taking on a life insurance policy bought by your parents
If your parents or grandparents have provided you with the gift of a life insurance policy, you’re ahead of the game when it comes to financial protection. Once ownership of that policy converts to you as you reach adulthood, you’ll have several choices to make around whether you’ll keep the policy and continue to pay premiums.
It’s not uncommon for parents to purchase life insurance for their children. Life insurance policies may be advertised to finance a child’s future needs, like education, or protect against expenses if a child passes away. Parents may want to transfer the policy to their children at a certain age and expect that they continue the premium payments.
If your parents purchased life insurance for you and now expect you to pay the premiums, it may be hard to adjust for this new monthly expense.
In this article, we explain the life insurance policies that parents buy for their children, the logistics of transferring the policy from parent to child, and what you can do if your parents transfer a policy to you.
Insurance for children
Life insurance for children is a popular insurance product sold to parents and grandparents. Used properly, it can become a great gift to a child or grandchild. But purchasers need to educate themselves about the possibilities and limitations to understand the best coverage for a loved one.
Your parents may have purchased a whole life insurance policy or term life insurance policy for you. Whole life insurance provides a payout regardless of when you pass away. In contrast, term life insurance only lasts for a set number of years—usually ten, twenty, or thirty years.
Insurance for children provides three general benefits:
- Preparations for future insurability
- Protection against expenses related to a child’s death
- Use as an investment vehicle or alternative to RESPs
Future insurability and premium costs
Generally, the earlier a person purchases life insurance, the lower the cost of premiums. Why? There’s a lower probability of someone passing away at 30 than there is at 70. Thus, if your parents purchase a policy for you at 17, it can lock in a lower premium and future insurability than if you buy it yourself at 27. Additionally, if you later discover that certain health conditions make you uninsurable, the life insurance that your parents purchased remains in effect.
Protect against expenses in case of a child’s death
No one wants to think about their child dying. But freak accidents can make it a reality. In such a scenario, a children’s life insurance policy can pay for funeral expenses and debts. This can at least take some of the financial hardship out of the situation.
As an investment vehicle
Life insurance advisors commonly advertise children’s insurance as a good investment. Whole life insurance policies can provide tax-free growth with the ability to withdraw from the policy and use it as collateral on a loan. There are also opportunities to choose how to invest the money, depending on the details of the policy.
Unlike other investments, life insurance can potentially skip certain estate taxes if you pass away. This makes life insurance a popular way to not only invest but to efficiently plan your estate.
Transferring the policy from parent to child
Most children’s life insurance policies don’t have an automatic transfer once you hit a certain age. Your parents or grandparents must choose to transfer it to you. While the ownership remains with your parents or grandparents, you have no legal right to the policy, and there are limited actions you can take regarding the policy.
Transferring the policy is straightforward and involves signing a series of documents. Once your parents move the policy to you, they no longer control beneficiaries, coverage limits, or other details unless otherwise specified. Additionally, as the new owner of the policy, you’ll now be responsible for any premium payments if applicable.
Generally, the transfer of a child’s life insurance policy from your parent/grandparent to you commences on a tax-free basis. There are some exceptions to this rule, and it’s best to speak with an accountant or your insurance advisor to understand more.
What to do when you receive a life insurance policy from your parents
Although your parents or grandparents may think they’re giving you a gift, the transfer of a life insurance policy can do more harm than good. Generally, the transfer means you’ll have a new monthly expense(s). Depending on your life circumstances, this expense (or expenses) may be unaffordable. Or, you may believe your money is better invested elsewhere.
If you need help managing policies, it’s best to find an experienced insurance broker to help you work through whatever coverages you now have. Some of the policies may have a “cash surrender value,” which means you can turn it into a lump-sum amount. However, cashing in your policy could have particular tax consequences.
Ultimately, an experienced life insurance broker can help you decide what coverage (if any) should be cancelled and what to keep. They can further determine if you’re underinsured in particular areas, such as critical illness insurance and point out where you have other coverage gaps.
PolicyAdvisor works with over 20 of Canada’s top insurance providers to make sure you get the best coverage for YOU. If you have questions about your current insurance plan and want to see what you may need or not need, chat with one of our expert advisors today.
- Generally, children's life insurance policies don't have an automatic transfer once you hit adulthood.
- The policy owner (your parent or grandparent) must transfer the life insurance policy to you.
- Transferring a policy is straightforward, involves signing a series of documents, and is best executed with the help of an experienced life insurance advisor.