Life insurance: Not such a weird gift idea

Life insurance policies under the Christmas tree may not leave eyes all aglow in quite the same way as a shiny new bicycle or the latest electronic gadget.

But unlike most presents, life insurance never will go out of fashion, says Kevin Lynch, assistant professor of insurance at The American College in Bryn Mawr, Pa.

"There are all kinds of ways it can be a very practical gift," Lynch says. "Will it have the punch or pizzazz of an iPad? No. But when you are a 25-year-old college graduate who can't find a job and you find out your grandparent funded a life insurance policy that has $35,000 in cash value, you may rethink the value of this gift."

As long as you keep up the premiums, a life insurance policy can provide financial security for decades to come, says Lynch. The most common ways to give a gift of life insurance are to make someone the beneficiary of your own policy -- so that they're protected in case something happens to you -- or to take out a permanent policy on the recipient's life and include a cash value component, similar to a savings account.

Taking the shine off Christmas?
There are risks with giving such a serious gift, however, warns Elizabeth Lombardo, a psychologist in Wexford, Pa. Some may find life insurance to be a disturbing reminder of their own mortality. In most people's minds "it has to do with death," she explains.

Brian Ashe, the treasurer of the nonprofit Life and Health Insurance Foundation for Education, or LIFE, says your gift might be misunderstood, particularly if you're taking out a policy on the life of a loved one. Your wife "might take a couple of minutes to sniff the rum cake you are giving her at the Christmas celebration," Ashe says.

Insurance companies won't let you take out a policy on just anyone's life, he adds. Generally, it has to be someone in whom you have an insurable interest, such as a relative, a business associate or a domestic partner.

Term or permanent?
You'll need to choose between term and permanent life insurance when you select your gift.
Term life provides coverage for a certain number of years. Note that if you take out term life on yourself as a thoughtful gift to your family, you could outlive the term of your policy, meaning your loved ones would receive no benefits upon your death.

Term life insurance policy premiums are based on a variety of factors, including the age, health and lifestyle of the insured. The premium for a 10-year $500,000 policy for a 40-year-old man in good health who doesn't smoke could vary from $27 to $90 per month, depending on the insurer, says Douglas Grills, an independent insurance broker in the San Diego area.

A permanent policy provides coverage for a person's entire life, as long as the premiums are paid. It can build up a cash value gradually, and the policy eventually can be surrendered for that amount, or you can borrow against it. The downside is that costs are higher than for term life.

Appropriate gift for a kid?
Some experts question the idea of buying life insurance policies for children. It's wiser for parents and grandparents to make sure their own lives are adequately insured, says Jack Hungelmann, Bankrate's Insurance Adviser and the author of "Insurance for Dummies."

But Lynch insists that buying a permanent life policy for a healthy child makes good economic sense. The cost, which is based on the risk of death, usually is very low.

You could set up a trust, the proceeds of which could pay the policy indefinitely, Lynch says. "When the child reaches age 25 or 35, the policy can vest into the name of the child and they become the owner. All of the cash value now becomes available to the child."

A typical permanent, $250,000 cash-value policy on the life of a 1-year-old grandchild would cost in the neighborhood of $3 to $4 per $1,000 of coverage, says Ashe. "So if I had a $250,000 permanent life policy and the rate was approximately $4 for each $1,000 of coverage, the (annual) premium would be $1,000."

How to gift life insurance
You can go online to buy a life insurance policy for a grandchild or other young family member, but Ashe recommends doing it the old-fashioned way: by talking to an agent. With personal contact "you have the added value of the agent's experience on the type of policy, what the taxation issues are and the proper beneficiary designations."

When you take out life insurance on someone else, or name someone as a beneficiary on a policy for yourself, the application will require that person's name, date of birth, information on how you're related, and often a Social Security number, says Ashe. You also will need to provide health information on the insured, even children.

"There is a nonmedical questionnaire where they ask, 'How tall is the child? What does the child weigh?'" Ashe explains. "For people who are older, medical examinations can be required, based on their age and the amount of the policy."
There may be a few hoops, but just keep in mind that a life insurance policy is the only financial product that guarantees a certain sum of money will be paid on a date that's uncertain, says Lynch. "That is why it is such a good gift."