What's the benefit of insuring children or grandchildren?

There are three main motivating benefits. First, qualification. People like to own insurance on children sometimes because they cannot qualify themselves. It also ensures that their grandchildren will have some life insurance, regardless of health or circumstances.

Secondly, a better internal rate of return. If the grandparents do qualify, and they are older, the internal ROR may be 3% on their policy, but their grandchild’s return might be 4.5%. Typically the grandparents are the beneficiaries, but the motivation is to improve the internal Rate of Return on the cash value. The grandparents could be 65 or 70, but expect to live decades longer.

Thirdly, life insurance policies are also a fantastic estate planning and asset transfer strategy. Although there are limits to the insurance you can get, once you have the insurance, you can gift life insurance (both cash value and death benefit) to the insured in unlimited amounts. Life insurance is the ONLY ASSET you can give income tax-free, to the insured (the person the insurance is on).

The caveats: The policy would be small in most cases unless there is substantial family wealth. The child’s parents have to get involved because you can’t take life insurance out on a minor without the parents’ approval. And generally, the parents of the child have to be insured for at least twice, preferably 4 times, what the child is insured for. If the children are old enough to work, they can be insured for 15-20 times their salary.