Taking Over Life Insurance Bought By Your Parents

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Article Contents
Picture of By <span>Matthew Roberts</span>
By Matthew Roberts

Updated on December 17, 2024

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Picture of By <span>Matthew Roberts</span>
By Matthew Roberts

Updated December 17, 2024

Visit author page

4 minute read

Article Contents

Sometimes, parents will purchase a life insurance policy for their children at a young age, then ask them to take over the policy when they come of age. But once they’re adults, they may have different financial obligations or life plans that make them rethink if they should take over the policy.

What are the options when your parents ask you to take over a life insurance policy? What are the benefits of keeping an active policy versus cashing it out? Read on to find out more about taking over a life insurance policy bought by your parents.

Taking Over a Life Insurance Policy at a Glance

  • When parents take out a life insurance policy for their children, it’s common to transfer ownership to the child once they’re able to pay for the policy themselves.
  • If your parents want you to take over a life insurance policy they bought, you have the option of either continuing to pay for the policy or cashing it out.
  • Ask your parents whether the insurance policy is term life or whole life, as this can greatly affect your decision to either keep or cancel the policy.

Understanding Life Insurance Policies Bought by Parents for Their Children

Life insurance primarily falls into two categories: term life insurance and permanent life insurance. Term life insurance provides coverage for a specified period, typically between 10 and 30 years. It’s often more affordable and suitable for those needing temporary protection, but due to its limited coverage, parents usually won’t choose this option for their children.

Permanent life insurance, on the other hand, lasts until death or until the policyholder stops paying for it. This includes whole life and universal life insurance, which can accumulate cash value over time. This is by far the more common type of insurance that parents purchase for their children, as permanent life insurance policies not only last until death, but can also accumulate cash value over time.

Evaluating Your Options

When it comes to taking over a life insurance policy bought by your parents, you have two main options to consider: maintaining the policy or cashing out. Both options have their pros and cons, which you need to weigh before making a decision.

By maintaining the policy your parents bought for you, you can enjoy the benefits of having a life insurance policy without having to apply for one yourself. The earlier in life you get a policy, the lower your premiums can get. This means that if your parents took out a life insurance policy for you at a young age, you might have very low premiums that you can keep paying for as you get older.

Additionally, since you already have a life insurance policy with a set premium, your premium won’t change even if health conditions manifest later on in life that may necessitate higher premiums for new applications.

Keeping an existing whole life insurance policy means that it will keep accumulating cash value as you age, resulting in significant gains later on. On the other hand, paying for life insurance premiums when you’re just starting out as a professional can put you under some financial strain.

Cashing out a life insurance policy involves surrendering it for its cash value. This option might seem appealing, especially if you have urgent financial needs. Depending on how much cash value has accumulated, you may incur tax liabilities upon withdrawal. You should note that only the amount exceeding what you paid in premiums is taxable.

However, this means forfeiting your life insurance policy and losing access to the death benefit. This can put financial stress on your family if you happen to suddenly pass away. Consider whether cashing out aligns with your long-term financial goals. Losing the death benefit could create future financial challenges for dependents.

Options for Taking Over a Parent’s Life Insurance Policy

Premium Dividend Offset

A unique feature of some permanent life insurance policies in Canada is the premium dividend offset, which allows policyholders to use dividends earned from their policies to pay premiums. When a participating life insurance policy earns dividends, you can apply these dividends to cover all or part of your premium payments. This feature means that you can keep your life insurance policy going without worrying too much about making monthly payments.

To utilize the premium offset feature, certain conditions must be met:

  • Your whole life insurance policy must pay out dividends.
  • The accumulated dividends must be enough to cover future premium payments.

If your parents have been paying for your life insurance policy for long enough, the dividends may be enough to cover all future life insurance premiums until either the end of your life or when you decide to cash out your policy. In either case, a “free” life insurance policy will be beneficial to both your financial planning and securing your family’s future.

Making an Informed Decision

Before deciding whether to keep a life insurance policy taken out by your parents or cash it out, you need to consider the following factors:

Financial Situation:

Assess your financial needs to determine whether you’re able to continue paying for the life insurance policy or if you need the upfront money from cashing out the policy. Consider whether you’re able to pay for the policy using the premium offset that’s available for many whole life insurance policies.

Policy Terms:

Go through the life insurance policy to understand the terms and conditions. Check to see if there are any penalties for early withdrawal or cancellation. If you plan on keeping the policy, make sure that the death benefit will be enough to support your beneficiaries and that the terms are right for your situation.

Beneficiaries:

Consider how many people may be dependent on your death benefit if you suddenly pass away. For individuals with no children or spouses, paying for a life insurance policy may seem like an unnecessary expense. However, if you have family members depending on your income or plan to have a family in the future, keeping your life insurance policy is a way to guarantee their financial security if the worst comes to pass.

Key Advice from MyChoice

  • If you have pressing financial needs or can’t afford to keep paying for a life insurance policy, then cashing out may be the best option. Otherwise, taking over the life insurance policy from your parents can keep your family’s future secure while also being a good financial strategy in the long run.
  • Ask your insurer if you can avail of the premium offset feature. This can make your life insurance premiums much cheaper, or even free.

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