A Grandparent’s Gift: For the Child Who ‘Has It All’
It can be impossible to know what to get kids for Christmas or other celebrations when they seem to have, well, everything. In today’s world, it’s not surprising that many parents opt for cash gifts, but the best way to give kids money may not be handing them a crisp $100 bill.
Kids these days. It can be impossible to know what to get them for Christmas or other celebrations when they seem to have, well, everything.
And with the holidays just around the corner, many a grandparent may find themselves asking:
- What sort of lasting gift can I get my grandchild this year?
- What type of present feels more special than all those plastic toys, and might even hold a bit of long-term value?
- How can I be sure my gift won’t be tossed aside for the next fad, or at the mention of their iPad?
We’ve got the answer: A whole life policy that includes an investment component that will grow with your child. This is a thoughtful strategy that allows you to pass on your wealth to the next generation.
So how exactly does this work?
You purchase a whole life insurance policy for your grandchild today, and transfer ownership to them – tax free¹, we might add – when they reach legal age. This means your grandchild can reap the benefits of your gift when they’re a bit more mature and while you’re around to see it (not so if you were to leave them the equivalent in your will).
How is this possible with life insurance?
When you think life insurance, you probably think about the money a loved one receives after the death of the person that is insured. While that is the primary purpose of a life insurance policy, whole life insurance comes with something extra called a cash value². This is a portion of the policy that grows over time – similar to an investment – and can be accessed while the policyowner is still alive.
Values that grow with your grandchild
Not clear on just how much this sort of investment can grow? Let us paint a picture for you.
Imagine you purchase your darling 5-month-old granddaughter a 20-pay whole life policy worth anywhere from $25,000 to $500,000 in coverage. To help the total cash value grow more quickly, you’ve opted for a nifty option called Paid-Up Additions (PUA), where you are putting that ‘something extra’ we mentioned above (i.e., the growth portion of your policy – otherwise known as the dividends³) towards buying another layer of coverage, resulting in a bigger return on your investment at a speedier pace.
And the best part? Payments stop after 20 years!
With the PUA dividend option, here’s how your granddaughter’s total cash value can grow⁴ as she gets older, depending on coverage amount.
As you can see, depending on which coverage amount you select, monthly payments can be drastically different. Not to mention, the money available to your granddaughter at various points in her lifetime can be modest or life-changing. Whatever the case, she’ll appreciate having access to funds — whether it’s a few thousand dollars in her 20s or in the millions as she nears retirement.
Remember, we mentioned this was tax-free above? That means there would be no taxes payable when you transfer ownership to your grandchild. However, if and when they access the cash value through a policy loan or withdrawal, they would be taxed – but in their tax bracket, rather than yours – which, in many cases, may be a significantly lower rate due to where they’re at in their career.
Also, your grandchild could name their own children as the beneficiaries (i.e., the person(s) you choose to
receive your life insurance payment in the event of your death) of the policy, passing the total death benefit on to the next generation – tax free, of course!
A six-step strategy
If you are living in comfort and would like to share the wealth with your grandchild, this six-step process is the way to do it:
- Purchase a participating whole life policy for your grandchild. You can choose 20-pay or whole life – it’s up to you!
- Name a contingent owner (i.e., someone who assumes ownership of the policy if you, the policyowner, dies). In this case, the parent or guardian of your child probably makes the most sense.
- Make the monthly or annual payments until you are ready to pass along ownership to your grandchild. In most cases, the child would take over the payments – unless you purchased a 20-pay whole life policy and payments have already stopped.
- At a date of your choosing (and when they are legal age), transfer the policy to your grandchild. At this point, ownership is now in their name.
- The beneficiaries on the policy would be updated to the person(s) and/or charitable organization of your grandchild’s choosing.
- Your grandchild can now access the cash value through a policy loan or withdrawal⁵.
A gift that keeps on giving
So why is purchasing a whole life policy a unique and lasting gift idea for a kid that ‘has it all’? Well, over the course of your grandchild’s lifetime, the cash value can grow considerably – which may be a huge help if they need money to pay for their post-secondary education, a wedding, or a down payment on a home!
And even if they decide not to access the cash value, they can rest easy knowing that they’re covered for life, despite any new health diagnoses or risky hobbies.
Still looking for that special, lasting gift? This just might be it! Contact your advisor to learn more, or let us connect you with a licensed advisor if you don’t already have one.
Disclaimers
¹According to the rules in subsection 148(8) of the Income Tax Act, the transfer of ownership can be tax free to a child or grandchild as long as there was no consideration paid on the transfer. The proceeds of the disposition for the transfer are deemed equal to the policy’s adjusted costs basis (ACB), resulting in no income tax payable by the policy owner when the transfer is made.
²Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued.
³Dividends are not guaranteed and are paid based on the overall experience of Serenia Life Financial, considering all risk factors. Dividends may be subject to taxation. Dividends will vary based on the actual investment returns in the participating account as well as mortality, expenses, taxes, lapses, withdrawals, and other experience of the participating block of policies. These factors have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.
⁴Illustration only, as of December 3, 2024. Age 0 based on female regular rates, paid up additions dividend option, and using current dividend scale. Future performance will be different than illustrated due to the variability of the dividend. All numbers in CDN $. Current monthly premium varies based on the specified coverage amount payable in 20 years. The policy is “paid up” at Age 20.
⁵Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
