Whole Life Insurance for Children as a Wealth Transfer Strategy

Whole life insurance is often viewed as a legacy-planning tool for adults, but when structured strategically, it can serve as a powerful wealth transfer and savings vehicle for children. Purchasing a whole life policy on a child not only guarantees lifelong insurance coverage but also creates a savings foundation that can grow over decades and be accessed in flexible, tax-advantaged ways. 

By starting early, parents or grandparents can fund a policy while premiums are low and allow the cash value to accumulate over time through the policy’s guaranteed and dividend-paying structure. These funds can later be used by the child in adulthood to support education, the purchase of a first home, starting a business, or as a long-term financial safety net. Because the policy is funded during the child’s early years, the power of compounding can significantly increase the value of this asset by the time it’s needed.

One particularly effective strategy is to use annual gift tax exclusion amounts to pay the premiums. In 2025, individuals can gift up to $19,000 per recipient per year without using any of their lifetime estate and gift tax exemption. Using these gifts to fund a life insurance policy can shift assets out of the donor’s estate while providing long-term benefits for the next generation.

Ownership of the policy is a critical consideration. If the parent or grandparent owns the policy, they retain full control over how and when the cash value or death benefit is accessed. However, this also means that the death benefit may be included in the owner’s taxable estate. Alternatively, the policy can be owned by a trust created for the benefit of the child or grandchild. This approach allows the donor to serve as trustee while keeping the policy outside of their estate, offering additional protection from creditors and long-term control over the use of the funds.

Beyond the death benefit, one of the greatest advantages of whole life insurance is the ability to borrow against the policy’s cash value. These policy loans are generally tax-free and do not require repayment on a set schedule. When structured properly, borrowing from the insurance company allows the full cash value to continue earning dividends and interest as if no loan had been taken. This feature makes whole life insurance a unique tool for tax-efficient income generation during retirement or for large, planned expenses throughout life.

Ultimately, a whole life insurance policy purchased for a child can evolve into a foundational estate planning instrument. It not only creates financial security for the insured child or grandchild but can also serve as a future asset in their own estate plan—for their children, charitable endeavors, or legacy goals. By acting early and thoughtfully structuring ownership and funding, this strategy enables families to build multi-generational wealth with clarity, flexibility, and control.