A Good Gift Made Better
It is not often that you have the opportunity to materially increase your children’s or grandchildren’s upside wealth without incurring any further risk. A simple tweak to a common existing strategy can make them over half a million dollars better off; all with relatively minimal effort. For those parents or grandparents who purchased juvenile life insurance policies on loved ones when were juveniles, there is a simple opportunity to consider that may be of value.
When the policy was applied for, the insurance company did not yet know who the gift recipient’s friends would be, what type of smoking or drinking behavior they may encourage, what types of sports they played, and what injuries or infections those lead to.
A basic tenet of risk underwriting assumes reality is slightly worse than average; thus every juvenile life insurance policy assumes the second lowest health class rating and most insurance companies are happy to leave the insured at that low rating.
However, upon the policy owner’s request, the insured usually has the right to enter underwriting to change the health class rating. This request can only result in a more favorable rating and cannot demote the policy’s current status.
While the moving parts that enable this are very complicated and you should probably seek the guidance of someone well versed in the matter, the effects are easy to understand: you pay the exact same (or possibly lower) premium but have a much higher death benefit and cash value1. This happens because the better the health class rating, the less the mortality cost and the greater the asset growth. A juvenile policy has a special Commissioners Standard Ordinary Mortality Table (CSO) filing that makes a health class change even more beneficial than an adult policy.
One of the primary mutual life insurance carriers illustrates a hypothetical life scenario of a child that had $500K of a death benefit in a whole life policy purchased on them at the age of six.
Everything between the two policies is equal until the insured turns 26. At this point, the health class rating change is requested (assuming that rating is changed from the de facto non-smoker class to preferred plus) and the effect of the cash value and death benefit over the next few years is illustrated in the following chart:
|Δ Cash Value||Δ Death Benefit|
|10 Years||$ 2,341||$ 10,196|
|15 Years||$ 7,319||$ 23,219|
|Age 60||$ 30,750||$ 64,070|
|Age 65||$ 49,867||$ 91,220|
|Age 99||$ 591,525||$ 591,525|
It is important to realize that the only difference that enables this drastic improvement in asset value is the simple request to have underwriting reconsider and upgrade the health rating on the policy. There are some caveats, as not all policies from all insurance carriers enable this, but with a little aid, there are still solutions to be had.
Since we know insurance is all about time and money, the sooner we can make this change the better. Some companies allow you to reconsider underwriting as early as age 18; thus the gifting parent or grandparent can leverage a higher percentage of the premium toward the tax preferred asset growth over the cost of insurance. If you do not have such an asset for your child, consider this a wake-up call.
About the Author – Nick Domino
Nicholas is part of a three generational family practice that has been ensuring individuals’ and closely held businesses’ financial security and prosperity for over 75 years.