Juvenile life insurance is a flexible financial product that insures the life of a child. It is favored by financial professionals for its unique tax and growth features and it provides cash value accumulation, tax-advantaged growth and guaranteed insurance for life.
1. Cash Value Accumulation
The cash value of whole juvenile life insurance increases by a minimum guaranteed interest rate, plus a non-guaranteed dividend declared annually by the insurance company.
In indexed juvenile life insurance policies, cash value increases are linked to equity indexes with downside protection and non-guaranteed elements that can provide additional growth. Some policies provide for both equity participation and a minimum growth guarantee
Juvenile life insurance is typically funded early in a child’s life, enabling the significant cash value buildup of a policy. With careful planning, by maximizing the allocation of each annual contribution to cash value and minimizing the portion allocated to a death benefit (a circumstance highly unlikely during the first several decades of the policy), the owner is able to leverage the tax-deferred savings of a juvenile life insurance policy.
2. Access to Cash Value
The cash value of a whole or indexed life insurance policy can be withdrawn or received as a guaranteed loan at any time, without a credit check, lengthy application process or lender approval. A policy owner will typically receive the withdrawal or loan amount requested in less than a week, providing an easily accessible source of funds. The policy owner has unrestricted access to the cash value of a juvenile life insurance policy, regardless of the age of the insured, or intended purpose of the funds. If the policy is held in a trust, the accessible cash value can be requested and distributed for any purpose permitted by the trust.
3. Tax Advantages
Juvenile life insurance offers several important tax advantages. The interest and dividend growth of the cash value of the policy is tax-deferred. Only withdrawals that exceed cumulative premium paid are treated as income for tax purposes. A policy owner is able to borrow money from the policy up to the accumulated cash value without any tax consequences as long as the policy remains in force.
A parent or grandparent may use the gift tax exclusion amount (currently $13,000 per donor, per year to any number of recipients) to pay the annual premium on behalf of their child or grandchild.
The eventual death benefit is received by a beneficiary tax-free. If the policy is owned by a trust, the funds are not included in the estate of the deceased for tax purposes.
Juvenile life insurance secures affordable lifelong insurance coverage regardless of the future health of the child or adverse family medical history.
Juvenile life insurance is generally issued based on a current or recent medical exam. Unlike the medical exam requirement for an adult requesting insurance coverage, a juvenile life insurance policy generally requires only age, sex, height, weight and general health information provided by a doctor or insurance agent.
5. Lower Costs
There is a lower cost of insurance associated with insuring the life of a minor, which allows for a smaller annual premium compared to similar insurance coverage for an adult. In a whole juvenile life insurance policy, the annual premium is guaranteed to never increase, regardless of any changes to the health of the insured.
6. College Savings With a Lifetime of Benefits
Juvenile life insurance is a tax-efficient, secure, growth-guaranteed college savings vehicle.
Unlike traditional college savings accounts and 529 plans, the cash value of a juvenile life insurance policy is excluded from most need-based financial aid calculations.
Life insurance is a stable and well-established tool for lifetime tax-advantaged savings and can be used for purposes other than college education.
7. Estate Planning/Legacy
Estate planning professionals recommend juvenile life insurance for parents or grandparents who seek to maximize the tax-efficient transfer of wealth and leave a substantial legacy for future generations.
Policy ownership may be transferred to a child any time after he or she reaches the age of majority, although the policy owner is under no obligation to do so. The policy owner can chose when the child will learn of the policy, access its cash value, or take ownership. There is no requirement to disclose the existence of the policy to the insured or any other family member.
9. Asset Protection
In most states, the cash value of a juvenile insurance policy enjoys broad protection from creditors and lawsuits. In a state that lacks asset protection provisions, the policy can be purchased by a trust domiciled in another state.
A well-structured juvenile life insurance policy will allow the parent to use the cash value of the policy to make future payments. Typically, after several years no further out-of-pocket contributions are required to maintain a policy. Additional annual contributions will result in greater cash value accumulation.