Juvenile life insurance is permanent life insurance that insures the life of a child (generally under age 18). It is a financial planning tool that provides a tax advantaged savings vehicle with potential for a lifetime of benefits. Juvenile life insurance, or child life insurance, is usually purchased to protect a family against the sudden and unexpected costs of a funeral and burial with much lower face values. Should the juvenile survive to their college years it can then take on the form of a financial planning tool.
History
Life insurance policies for children became popular in the 19th century to pay funeral and burial costs during a time of high infant mortality. Initially controversial, life insurance for children eventually gained broad acceptance. Unlike traditional life insurance, burial insurance policies were marketed typically to the poorer classes. Mutual aid societies sponsored burial insurance policies for immigrants and religiously affiliated groups. Such groups had their origins in ancient Rome, and were similar to burial societies, common in England during the industrial revolution and Jewish communities since the 13th-14th centuries.
Today, funeral and burial policies ("child life insurance") typically have a face value ranging from $5,000 to $50,000; do not require a medical exam, and provide the owner of an unused policy the choice of a distribution of the accumulated cash value or the option to convert the policy into a permanent whole life policy. There are several companies well known for promoting and offering child life insurance. Funeral and burial insurance is similar to whole life insurance, but with lower face values, fewer rider options, and no medical underwriting.
Juvenile life insurance as a financial planning tool
In recent years, juvenile life insurance has become a popular college savings, lifetime savings, investment, and estate planning tool. It is increasingly popular with financial planners and insurance professionals for the following benefits:
Buildup of tax-deferred cash value inside the insurance policy. A policy can be fully paid in as little as five years. Flexible access to cash value. Cash can be withdrawn or received as a guaranteed loan at any time, without a credit check or lender approval. Face value is received free of income tax. In most states the cash value of a juvenile life insurance policy is protected from creditors and lawsuits. If structured using a trust, the ultimate payout of a policy may not be subject to estate tax, or the public and contestable probate process. Can be funded using gift tax or generation-skipping tax exclusion amounts.
Most insurance carriers require that a parent have a life insurance policy in place prior to purchasing a policy for a child. A policy purchased for a child can have a face value up to half that in place for the parent (in New York it is up to a quarter of that which is in place for the parent up to the child's fifth year). A grandparent is eligible to purchase a policy for a grandchild with fewer limits.
Cash value
The growth of the cash value inside an insurance policy in a tax-deferred environment (through guaranteed interest and credited dividends) creates lifetime saving opportunities that can be used for any purpose: to pay for college, finance the purchase of a home, establish a supplemental source of retirement income, or provide security, maintenance and support for future generations.
Premium
A juvenile life insurance policy typically requires a minimum of $700 of annual premium, which provides approximately $100,000 of face value. The policy owner may utilize the gift tax exclusion amount (up to $15,000 per person per year per child, in 2018) to help pay the annual premium and avoid gift tax liability. Face amounts for juvenile life insurance policies of this type range from $100,000 to $10,000,000.
Guaranteed growth
Many insurance companies offer policies with a guaranteed interest rate plus a non-guaranteed dividend. Each insurance company’s dividend is determined by its claims, investment performance, and administrative expenses. Some companies have a record of consistently paying annual dividends for over 100 years. Several insurance companies offer the option of having a portion of the return based on the performance of an equity index.