Should Your Clients Purchase Life Insurance for Their Children?

Baby boomers are facing a broad array of financial challenges today. They may recognize the need for life insurance, but they may be hard-pressed to pay the premium. Many look to their parents for financial assistance.

If you have a senior client who decides to purchase a life insurance policy for their adult child, there are two possible options for policy ownership. In the first scenario, the elder parent owns the policy. If the client decides this is the option they wish to go with, the underwriter will need to be convinced that a legitimate insurable interest exists. For example, is the elder parent financially dependent upon the adult child? Does the adult child owe him any money? Are they partners in a business? Also, if the elder parent owns the policy, then the life insurance contract becomes an asset in his name. This may raise undesirable tax consequences. Finally, there is the question of estate planning. If the life insurance asset is to be added to the estate of the elder parent, to whom will this money be passed when the estate is settled? If the life insurance is intended to support the adult child's spouse, then legal measures must be implemented to make sure this takes place.

An alternative scenario calls for the adult child to own the life insurance policy and name someone else as the beneficiary. The elder parent simply pays the premium, or lends the premium funding to his adult child. Here, the adult child becomes dependent financially on the elder parent. There is certainly some risk involved for both parties. What if the dependency creates resentment, however unintentional, and strains the relationship between parent and child? What if the elder parent experiences a financial or health crisis and suddenly needs the money back?

Taking out life insurance on an adult child is a strategy that calls for a large amount of caution. If your client is considering this strategy, here are some guidelines to consider when working with the family.

1. Carefully assess the financial situation of the adult child, as well as the elder parent. Try to preserve independence to the greatest extent possible, for everybody. This will be best for the relationship.
2. Consult with tax and legal professional partners to identify the financial and legal tools most appropriate for your client's particular situation.
3. Be sure to get your client prequalified for coverage.

Life insurance can be an enormous gift, and that is especially true when a parent gives the gift to a child. As long as guidelines and circumstances are carefully considered so that the best decision is made for everyone involved, the choice can be a good one for many clients.

Steven H. Kobrin is an independent life insurance broker and nationally recognized expert in field underwriting for people considered high risk. He can be reached at (866) 633-1818 or [email protected].