My Parents Took Out a Life Insurance Policy on Me as a Baby. What Now?

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Is the Policy My Parent Bought on Me When I Was Young Now Mine?

The simple answer is no. In most cases, the life insurance policy purchased for a child doesn’t automatically become their asset when they reach adulthood. While some companies have products that transfer ownership to the child at age 21, the majority keep the ownership with the parent or grandparent. This means the policy owner maintains control, even if the child is the insured person. The child typically doesn’t have legal rights to the policy, even as an adult.

Why Buy Life Insurance on a Child?

There are many reasons why parents and grandparents choose to buy a child’s whole life insurance policy.

The advantages include:

Securing Low Premiums: By buying early, you lock in affordable premium rates that remain fixed over time.
Ensuring Lifelong Coverage: Regardless of any future health issues, the child is guaranteed life insurance coverage.
Flexibility to Increase Coverage: As the child grows, there’s an option to purchase additional coverage, adapting to changing needs.
Building Cash Value: Over time, these policies accumulate cash value that grows along with the child, serving as a financial asset.

While these policies usually offer minimal coverage in the range of $5,000 to $50,000, they can provide critical financial support in the unfortunate event of a child’s premature passing, helping cover funeral expenses and other associated costs.

What You Need to Know About Policy Ownership

The owner of a life insurance policy will always have control over it, even if they aren’t the insured person. The policy owner is also responsible for making sure the premiums are paid.

Parent Owners Can Transfer Ownership (if they want to)

Policy owners can transfer ownership to the adult child if they choose to do so. In fact, this is a popular decision.

When the adult child grows up and has a family of their own, this small whole life insurance policy purchased on them when they were young has accumulated cash value. These funds can be accessed through policy loans or surrender.

But parent/grandparent policy owners are under no legal obligation to transfer ownership or ensure the adult child benefits from the policy, even if it’s requested. As owners, they have complete control of the policy during your (the insured’s) lifetime.

Options policy owners have:

Terminate the policy in exchange for its surrender value
Sell it for cash
Gift it
Transfer ownership
Change beneficiaries
Access the cash value for various purposes

Parent Owners Can Change Beneficiaries (if they want to)

In lieu of transferring ownership, some parent/grandparent owners may also choose to just change the beneficiary. However, we don’t recommend this course of action.

When parents or grandparents purchase a life insurance policy on their minor child, they are typically the beneficiaries. When this child grows up and has a family of their own, some policy owners may choose to change the beneficiary to the child’s spouse as loving gesture.

With this arrangement, the parent still owns and has control over the policy. They still pay the premiums. If they want to access the cash value account, they can, but the death benefit goes to the child’s spouse when the child dies.

Why we don’t recommend this: The involvement of three different individuals as the owner, insured, and beneficiary creates a tax complication. In the event of the insured’s passing, the IRS perceives the policy owner as gifting the death benefit to the beneficiary. Consequently, the policy owner may be subject to gift taxes on the amount.

To avoid the issues mentioned above, transferring ownership to you (the insured) is the best course of action.

Children’s whole life insurance policies are purchased out of love and protection. There’s no reason to feel uneasy; rather, it’s an opportunity to have a meaningful conversation with your family. Clear communication is key.

Should you ever have genuine worries about the handling of a policy connected to your name, don’t hesitate to seek guidance from your local insurance commissioner.
You can find contact information for the commissioner’s office in the state you live in here: NAIC.org.