Ask a Fee-Only Financial Planner: What Should I do with the Life Insurance My Parents Took Out on Me as a Child?

Welcome to our “Ask a fee-only financial planner” series, where Nicole Sullivan, co-founder of Prism Planning Partners, shares her expert insights on common questions about financial planning topics. 

Question: My parents got life insurance on me when I was a kid. Now I’m an adult, what do we do with it?

This is a great question and can be especially relevant for new parents!

First, before we answer this question, it’s important to define a couple of important parties to a life insurance contract:

1) The Insured: The life insurance contract will pay out when this person dies. This person may have to undergo underwriting (i.e., a health exam, health questionnaire, and perhaps blood draw) so the insurance company can determine how risky they are to insure.

2) The Owner: This person is in charge of the life insurance contract. They are responsible for paying the premiums. They can make changes to the policy, too, and designate a beneficiary.

3) The Beneficiary: The person, people, or company who receive funds when the insured dies.

Now, you might be asking, why in the world would someone want to buy life insurance on their young child? To be honest, I often ask this question too. However, the insurance companies rationalize the sale of these policies for a couple of reasons.

1) To help build wealth for a child. This is not my favorite way to save for a child. Life insurance contracts have costs and fees built in, and quite simply, those expenses eat away at returns.

2) To protect the child’s future insurability. For example, if the child develops a health condition at some point, the parents can “lock in” a child’s good health and lower rate.

3) To “pay a parent back” for expenses if a child passes away. Often, these policies are structured where a minor child is the insured, and a parent is the owner and beneficiary. In most cases, the parent pays the premium for several decades and is the owner and the beneficiary.

Say you are now an adult and want life insurance for your own life. Can you use this policy?

The answer is yes. But do you want to?

As owners, your parents have ultimate authority over what to do with these policies. There are a few options:

1) Do nothing. If you die, your parent receives a death benefit. Your parent can cash in or surrender the policy. They can keep the cash or gift it to you, as long as any one parent hasn’t gifted you more than $19,000 that year (2025). However, your parent should be warned that surrendering a life insurance policy may have tax impacts on them.

2) Your parent can still own and pay for the policy but change the beneficiary from themselves to your child (their grandchild) or someone else. This is often NOT ideal. Life insurance is often received tax-free. If three different people are named as owner, insured, and beneficiary, the beneficiary may owe taxes when the insured dies.

3) Your parent (owner) can sign the policy over to you (insured), so you’re the owner. Normally, this would cause tax implications, but because of the exception to the transfer for value rule, it doesn’t. The transfer for value rule states that if a life insurance policy is transferred for something of value, the death benefit becomes taxable. However, when a life insurance policy’s ownership is transferred to the insured, the death benefit still remains tax-free. As the new owner, you’re now responsible for paying the premium. Also, as the new owner, you can change the beneficiary, make changes to the investments (if applicable), or cancel the policy.

Still trying to figure out what to do? 

First and foremost, it’s always advisable to seek the guidance of an accountant, tax, or financial professional before making any decisions. Their expertise can provide you with the reassurance and confidence you need during this process. 

Luckily, the team of fee-only CFP® Professionals at Prism Planning Partners can help!  If you want to learn more about your finances with my help, click the link below to book a call with me!