Marvin Feldman, president and CEO of the nonprofit Life and Health Insurance Foundation for Education (LIFE) in Arlington, Va., notes that while using a permanent life policy's cash value can be a great gift to children, parents should avoid putting themselves in financial jeopardy.
"The first thing they need to do is consider their own financial situation," he says. Consider whether you might need that cash value yourself.
3. Buy life insurance for your child
The main reason to buy life insurance is to replace a wage earner's income. Although it often is dismissed as unnecessary, buying a permanent life insurance policy for a young child can be beneficial, says Komer. "It's a great first start to getting them some financial security, something you should think about right away."
For example, Komer says a $20,000 policy purchased at birth may accumulate as much as $4,000 in cash value by age 18. With annual premiums often less than $200, this can be a vehicle for helping a child get cash for college or other needs.There's a downside to borrowing against the cash value of such a policy. Not only can it reduce the amount of cash available in the future, but depending on the specific provisions of the plan, it also can reduce the death benefit. If you are planning the gift of a life insurance policy, consider life insurance companies that offer guaranteed coverage riders that allow your children to increase their coverage level in the future without having to go through the underwriting process. This means they'll be able to buy more coverage in the future regardless of health conditions.