Dec 1, 2023 4 min read

With the season of giving beginning, and this question posed by one of my licensed agents, I thought this topic would be interesting: What is the best gift for a child, a whole life insurance policy or a 529 educational savings account?

In an ideal world, both would be great gifts. Unfortunately we don’t live in an ideal world. Most of us have limited resources and choosing what would be the best gift for a child or grandchild is not easy.

I could show the financial benefits of both and will do so in a future column. Today, let’s just look at the emotional decisions involved.

Understand your 2-year-old is not going to get excited about a piece of paper protecting their financial security. If your goal is to put a smile on their face on Christmas morning, choose the latest toy.

But if you want a gift that will last their lifetime and may not be appreciated until long after you are gone, both whole life insurance and 529 plans fit the bill.

Buying life insurance is an emotional decision. We first must accept the fact that one of the dearest people in our lives will die. I have parents who refuse to talk about life insurance on their children because they believe not talking about it will prevent death. Every time I see a campaign to raise money for a child who died, I wonder if someone was afraid to address the issue.

Life insurance on a child will provide money in the event of an untimely death. It will also do much more. If the policy is written correctly it will provide living benefits in the form of cash values and dividends. Its cost will be at the lowest rate the child will ever get, enabling them to provide benefits to their family years in the future. Riders added to the policy can guarantee their ability to purchase additional insurance in the future regardless of their health. In my office 15% of the applications we submit are declined or rated (requiring additional premiums) because of unhealthy applicants.

Whole life insurance policies can be written with premiums being paid in advance so the child may never need to pay for the policy. They can be written with limited payment periods, such as 10 or 20 years. Future dividends can be used to pay the policy if the child cannot afford to pay them.

There are two types of educational savings plans: 529 plans and Coverdell IRAs. These accounts offer tax-free investment growth and tax-free withdrawals when the funds are used for qualified education expenses. Multiple people can contribute to the same plan. For example; two sets of grandparents could contribute to one child’s educational savings plan. Pennsylvania provides a tax benefit through a state income tax deduction for 529 plan contributions. This deduction can be up to the federal gift tax exclusion.

This column took me longer to prepare than most. I wanted to be honest with myself on what I think is best for the child. Every way I look at it, whole life insurance is the first gift I would give my children and my grandchildren. I don’t know if they will go to college. If they do, maybe they will get scholarships. I do know that the cost of a whole life insurance policy is so small that if you invest for 18 years it will not be the difference. If they do not go to college, I still believe they will lead successful and productive lives. The low cost, the cash values, the dividends, the guaranteed insurability will all be future benefits they will enjoy.

If you have a topic you would like me to write about email me at bob@BobHollick.com.