While I entirely agree with some people's view that for most families it is a bad idea to buy life insurance protection on their children, I would like to offer a more balanced approach. There are situations where insuring a child is a good move. One reason can be that this way future insurability is ensured and low premiums can be guaranteed. Another, much more important, reason can be that through a universal life insurance policy on a child, a very advantageous tax shelter can be created for some people who otherwise perhaps do not have a large enough tax-shelter, and who do not want or cannot buy any life insurance policy on themselves. Accumulating money in such a policy can be used, e.g., for the post-secondary education of the child. If, reaching the age of majority, the child becomes the owner of the policy, there probably will be no serious tax paid on the money withdrawn from the policy funds.

The parent (grandparent) does not have to hand over the ownership of such an insurance policy when the child becomes an adult. Instead, she/he can be made a contingent owner; this way, the parent / grandparent can keep control of this asset, and can use the wealth accumulated in it as a source of income for retirement, through either withdrawal of income or raising a (tax free!) bank loan and using the insurance as a collateral.

A further twist can be added to the above design: the child does not have to be a minor. This created an opportunity for a 73 year old lady to put a large sum of money into a joint-last-to-die universal life insurance policy on her own life, together with her 45 year old daughter. Joint last to die universal life insurance plans are the least expensive form of permanent insurance protection when the fundamental objective is estate planning or capital accumulation in a tax deferred way. The tax shelter created by the universal life policy ensured dynamic growth, advantageous utilization of the assets through bank loans when needed, no access to this asset for the son-in-law whom the lady did not really trust (at least regarding money), and the prospect of a windfall of tax-free money for the grandchildren, hopefully decades later, when the daughter dies. Obviously, most people cannot afford to create such a rich family legacy; those who can afford and want to do so should consider what such creative (non-traditional, but perfectly legal) applications of insurance offer.

I must repeat that using life insurance as an effective financial tool should be secondary to its basic function: protection of families. Unfortunately, I have seen a family who had a universal life insurance policy on a 2 year old child, while the sole breadwinner in the family had only $50,000 coverage on himself. Their 'logic' was that they do not want to spend money on the insurance on the father, because that is expensive, while the few bucks a month on the child's policy will result in a nice cash value when she will attend university. To me, this is nonsense. Yes, it's quite probable that the father will reach the time when the daughter will go to university... but what if he will not? Dealing with this small, but not negligible chance is what insurance was invented for in the first place. Should the father die early without substantial insurance, the child would have much more serious problems than financing university education. The child's interest in this case would be much better served with a bigger policy on the father.

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