Life insurance on adult children

By Steven Kobrin

Steven H. Kobrin, LUTCF


In my last article, I discussed the benefits of a parent taking out life insurance on a minor child. But what about adult children? Is it a good idea for an elderly parent to own or pay for life insurance on an adult child?

After all, 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.

In this article, we will explore some of the ramifications.

Scenario 1: The elder parent owns the policy.

If the elder parent wishes to own a life insurance policy on his adult child, then 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.

Scenario 2: The elder parent pays for the policy.

An alternative scenario calls for the adult child to own the life insurance policy and make his wife the beneficiary. The elder parent simply pays the premium -- or lends the premium funding to his adult child.

Here, the adult child becomes financially dependent on the elder parent. This can be risky for all involved.

What if the dependency creates resentment, however unintentional, and strains the relationship between parent and child?

What if the elder parent unfortunately experiences a financial or health crisis and suddenly needs the money back?

Guidelines

Taking out life insurance on an adult child is a strategy that calls for a large amount of caution. If your family is considering this strategy, here are some guidelines:

(1) Carefully assess the financial situation of the adult child, as well as that of the elder parent. Try to preserve independence for everyone, to the greatest extent possible. This will be best for the relationship.

(2) Consult with your tax and legal advisors to identify the financial and legal tools most appropriate for your particular situation.

(3) Be sure to get prequalified for coverage. This way, you know you will get the best value for your premium dollar.

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