[USER]

My MIL just texted me to let me know she wants to purchase permanent life insurance policies for my two kids (ages 5 & 3) to give the gift of the cash value when they are older.

She already has 529s for them, no clue what she contributes annually.

She asked “any reservations before I purchase”?
We know pretty much anything else would be a better investment.

We have a fairly open relationship. Should I just give my sincerest gratitude and move on? Or offer the alternative that a brokerage account that will earn a much higher return over the next 20 years?

WWYD?

[Amanda]

Honestly, the BEST time to buy a permanent life policy is when the primary is little because it’s so cheap. By the time your MIL has passed, there would be no surrender value on the policy so they could take the money out as they’d like, or “borrow” and lapse the policy to avoid taxes on it.

If something dreadfully awful happened to one of your children, final expenses would be taken care of and it would likely provide some much-needed bandwidth for time to grieve afterwards.

Or if something life-changing should happen, they would have a policy in place when they might not otherwise qualify (i.e., I have two nephews that were diagnosed with brain cancer as teenagers and are uninsurable).

It may not be the *most* prudent way for her to pass wealth on to your children, but it’s not altogether a bad option. Super nuanced.

[Lori]

Policies ON the kids or on herself? A better deal would be $100k policies on her with the kids as beneficiaries, depending on how old grandma is.

I have a Universal Life policy my parents set up for me when I was a kid. $100 a year and $100k when I die, to someone.

Or, I could cash out the cash value, which is only like $15k now.

Or I could cash out and invest it and likely make more than $100k for me or someone else.

[Juliett]

I think it’s generous but a terrible idea unless she’s buying them outright.

Not sure what your relationship is like, but I’d ask for maxing the 529 or even a brokerage account.

The kids don’t need these policies.
Now if she had money just rotting in savings like hundreds of thousand of dollars and she can pay the premiums up front?

Then it’s not a terrible investment.

What happens if she can’t pay the premium? Do you just forfeit the policy?

The financial advisor is just trying to make commission.

[Heather]

I would just say thank you and move on. Any gift is a wonderful thing.

[Ann]

Suggest a brokerage account and sell her on the idea by letting her know the kids could learn about investing with her.

[Brad]

“We really appreciate the generosity but have reservations about that particular type of plan.

Is there a particular reason why you chose that one?

Would love to talk about it before you buy”

[Carrie]

Kind of depends on what size of policy she is buying. My husbands grandparents bought him a policy when he was little and it was nice that we had the option to purchase a larger policy when he was 30 even if he had previous conditions.

With that said it was/is a little policy. We actually still have it because its cash value was only.

1k but the interest on the policy now pays for itself and will be worth 10k when he dies plus interest.

We figure it can be used to burry him someday like his grandparents were making sure would happen.

[Ryan]

I would kinda view this as MIL buying the kids a “house”, but a “financial house” instead of a physical house. The policies would be providing a financial foundation for the kids.

So, I wouldn’t expect this money to compete with other type of investments like equity funds.

And the policies would provide some guaranteed insurance in case they were to become uninsurable later in life.

I would want to understand the policies better and how they will funded if she passes before the kids become of age since I assume you would become owners in that situation.

Not sure whether I would buy the policies myself, but I wouldn’t go out of my way to dissuade MIL if that’s what she really wanted to do.

It’s a very nice thing she’s doing.

[John]

Have her contribute to a 529 college plan. I understand there is additional value to this when it’s done by a grandparent.

[Fewee]

I have them on my kids. Honestly it was a blessing I was able to get it before they were diagnosed with something that made them uninsurable.

Cheap at that age.

My parents got me a couple when I was young and put a lump sum just small polices but I’m 50 now and have never had to pay anything for them when she gave them to me after I graduated college.

[Dave]

Perhaps she could open a custodial brokerage account on their behalf and start investing in VTI or similar?

[Alicia]

The financial planner who suggested this gets one year of her returns just for having her sign up, so that’s why she suggesting that.

I would fire the financial planner and go for one that gets no commissions and cannot sell products.

[Rita]

I would outline the negatives of this option and the positives of the option you think would be better.

Also, I feel like this news should come from her child not you, just comes off better that way.

[Jennifer]

I know I have a unique life experience but our son can’t be a juvenile rider on any private policies we have due to pre- existing conditions – we are grateful we had purchased a whole life policy at birth for him.

It’s not much, but it will cover his final arrangements someday, which is a little peace of mind knowing his future spouse will have that at least.

[Lisa]

I think one of the best use cases for whole life is for children. The arguments against these don’t quite apply when buying for a child.

You get a lot more benefit without the high cost.

I would accept these and be grateful your kids will have a lot of financial flexibility when they are older

[Adam]

I’m 38 – the $12 of monthly whole life (that I’m now responsible for paying) is worth 12k of cash value and 48k of life insurance.

It would have been worth 60k in a brokerage fund invested in S&P.

Eerily similar, within $200 last time I checked.

So, if MIL wants to hold money from grands until they’re dead vs alive for some macabre reason, it’s a strong choice.

[Lauren]

I’m early on this journey and several years ago got talked into a 20 year whole

Life policy for my daughter.

Since then she has been diagnosed with a few things, and even though I had second doubts at first about the policy, I honestly don’t know if/what coverage she would qualify for now, so I’m glad to have it for her.

[Christine]

I’m a whole life customer, and I think it’s a very generous offering from your MIL. The cash value is something available to the kids for using towards life needs while never actually affecting the compound growth and it’s tax free growth.

In terms of returns, a whole life policy isn’t going to generate the same as the S&P 500.

But the S&P 500 doesn’t give you the same kinds of benefits that whole life insurance policies give you.

[Marcia]

I would tell her not to do that and give an alternative. Most people understand if they are shown an example of how much money they would have if they just invest the money… it’s usually quite significant.

[Scott]

I like the suggestion in one of the first commenters. Thank her for her generosity and ask why she chose that type of vehicle.

That opens up the conversation in a respectful way and also encourages dialogue about the pros/cons versus other vehicles.

[Amar]

Nothing makes me more upset than slimy insurance people taking advantage of ignorant and elderly people. Had a similar incident with an uncle who insisted he needed to buy insurance.

He has grown children but some @$$ wipe convinced him to open a whole life policy and I told him he didn’t need it.

Somehow the insurance guy got my number and kept calling me trying to explain to me why it’s as such a great “investment”.

Fast forward 1 month and the same family member got same coverage for 12 bucks a month of term from his employer

[Author]

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