The idea of buying life insurance for your own child might seem distasteful at first--no one wants to consider the unthinkable. But purchasing a policy for a child or grandchild isn't about protecting your financial interests; it's about ensuring the child's financial future.
Depending on the type of life insurance you buy and how well the insurance company's investments perform, the policy could help pay college expenses or provide a nice nest egg once the child or grandchild reaches retirement.
Purchasing a policy also locks in the child's insurability. Usually, children don't have to go through a medical underwriting process--the parents simply answer a few medical questions. As long as the policy remains in force, the child will always have life insurance.
You can purchase life insurance for a child through a rider on your own life insurance policy or by purchasing a term or whole life insurance policy for the child. A term policy covers someone's life only for a certain number of years and has no cash value, but most term life policies can be converted to permanent life insurance.
Whole life covers the insured person for his or her entire life and includes cash value, which the owner of the policy can borrow against. The policyholder can choose whether or not to repay the loan, although not repaying the money reduces or eliminates the death benefit.
If your child maintains the policy for many years, the cash value will grow tax-deferred. The child can then cash in the policy or borrow against it to supplement retirement savings. Another option is to convert the policy into an annuity to provide an income stream through retirement.
For more, see "Fund your child's retirement now with life insurance."
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