In my last blog entry, I wrote about using permanent life insurance to fund a child’s college education. Now I am going to expand on that topic, this time from the perspective of a grandparent who wants to utilize his or her $14,000 annual gift tax exemption (per recipient) for the purpose of giving one or more grandchild a head-start on education and financial security.
Unlike toys, clothes or the latest video game, permanent life insurance is a gift that will never break, never wear out, and never go out of style. Becoming insured at a younger age often means lower premiums, easier qualifications and more time to grow cash value. As a result, a grandparent has the capability to do something for a grandchild that they can not do for themselves: create a resource that can be used to help pay for college, a wedding, a first home—or any other future needs.
From a tax standpoint, there are several advantages for a grandparent to make a gift of permanent life insurance to a grandchild. First, the current gift tax exemption is $14,000 per year per child, or $28,000 combined for two grandparents. Alternatively, a grandparent may gift $70,000, or $140,000 as a couple, in one lump sum for one five-year period.
The second advantage is that the gift is not only tax-free, but it removes that amount of money from the grandparent’s estate for purposes of future estate tax consideration. Finally, as part of a permanent life insurance policy, the money within the policy’s cash value grows tax-deferred and can be withdrawn income tax-free. Therefore, once the money has been gifted, there is generally no tax on any of the gift or any of the future cash value growth in the policy. Furthermore, for purposes of college tuition, the cash value in the permanent life insurance policy does not count against the child’s scholarship eligibility.
If a grandparent, or pair of grandparents, has the means, college funding by way of permanent life insurance policies is a great way to utilize the gift tax exemption, remove money from their estate, and set up their grandchildren for a college education without the burden of student loans. It also locks in the child’s insurability at a young age and gives them additional financial freedom and protection throughout their lives. *
If you are a grandparent that would like to pass on a legacy of education and overall financial well-being to your grandchildren, this strategy might be the right one for you. It will let you immortalize your love for your grandchildren in a gift that will grow as they grow, and let you share in the special moments throughout their lives.
* Loans against your policy accrue interest and decrease the death benefit and cash value by the amount of the outstanding loan and interest.
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Provided by Adam W. Slocum, Financial Services Professional** with New York Life and NYLIFE Securities LLC. www.newyorklife.com/agent/awslocum Mr. Slocum works with families and small business owners to help them protect and plan for their financial future. He graduated from Amherst College and earned his MBA from the NYU Stern School of Business. He worked in development roles with several start-up firms before joining New York Life in 2011. He lives in Manhattan with his wife, Taryn, and five-year old son, Andrew.
** Registered Representative for NYLIFE Securities LLC (Member FINRA/SIPC), A Licensed Insurance Agency.
The term “strategy” when used within this piece does not imply that a recommendation has been made to implement a financial planning concept. Nor is it intended to be specific legal, accounting or tax advice. Consult your tax and/or legal adviser before implementing any tax or legal strategies.
The views and opinions expressed on this blog are purely the blog contributor’s. Any product claim, statistic, quote or other representation about a product or service should be verified with the manufacturer or provider. Writers may have conflicts of interest, and their opinions are their own.
