A Grandparent’s Gift: For the Child Who ‘Has It All’

Kids these days. It can be impossible to know what to get them for birthdays or other celebrations when they seem to have, well, everything.

And with the holidays just around the corner, many a grandparent may find themselves asking:

• What sort of lasting gift can I get my grandchild this year?
• What type of present feels more special than all those plastic toys, and might even hold a bit of long-term value?
• How can I be sure my gift won’t be tossed aside for the next fad, or at the mention of their iPad?

We’ve got three words for you: Intergenerational. Wealth. Transfer. 

Don’t let the complicated name fool you. There’s an acronym (IWT), plus it’s as simple as six steps – and we’re here to break the process down. Not to mention, it checks off all the important must-haves on your wish list.

Lasting? Yes!
Special? Absolutely!
Of value? 100%.
Can’t be tossed aside? Literally.

So what exactly is an IWT?

An Intergenerational Wealth Transfer is as simple as purchasing a whole life insurance policy for your grandchild, and transferring ownership to them – tax free¹, we might add – when they reach legal age. This means your grandchild can reap the benefits of your gift while you’re around to see it (not so if you were to leave them the equivalent in your will).

How is this possible with life insurance?

When you think life insurance, you probably think about the money a loved one receives after the death of the person that is insured. While that is generally the primary purpose, whole life insurance comes with something extra called a cash value². This is a portion of the policy that grows over time – similar to an investment – and can be accessed while the policyowner is still alive.

Values that grow with your grandchild

Not clear on just how much this sort of investment can grow? Let us paint a picture for you: Imagine you purchase your darling 5-month-old granddaughter a 20-pay whole life policy worth $500,000 in coverage. To help the total cash value grow more quickly, you’ve opted for a nifty option called Paid-Up Additions, where you are putting that ‘something extra’ we mentioned above (i.e., the growth portion of your policy – otherwise known as the dividends³) towards buying another layer of coverage, resulting in a bigger return on your investment at a speedier pace. And the best part? Payments stop after 20 years!

With the Paid-Up Addition dividend option, here’s how your granddaughter’s cash value and death benefit can grow⁴ as she gets older:
As you can see, at age 20, she’d have over $100,000 available to her – to help pay for her post-secondary education, or perhaps a gap year where she travels around the world. If she doesn’t touch the cash value until she turns 30, she’d instead have access to a nice sum of money for a down payment on a home. And if she were to leave the cash value alone until her retirement years, she’d have money in the millions.

Remember, we mentioned this was tax-free above? That means there would be no taxes payable when you transfer ownership to your grandchild. However, if and when they access the cash value through a policy loan or withdrawal, they would be taxed – but in their tax bracket, rather than yours – which, in many cases, may be a significantly lower rate due to where they’re at in their career.

Also, your grandchild could name their own children or grandchildren as the beneficiaries (i.e., the person(s) you choose to receive your life insurance payment in the event of your death) of the policy, passing the total death benefit on to the next generation – tax free, of course!

The six-step strategy

If you are living in comfort and would like to share the wealth with your grandchild, all you need to do is follow this six-step process to gift your grandchild IWT this holiday season.

1. Purchase a participating whole life policy for your grandchild. You can choose 20-pay or whole life – it’s up to you!
2. Name a contingent owner (i.e., someone who assumes ownership of the policy if you, the policyowner, dies). In this case, the parent or guardian of your grandchild probably makes the most sense.
3. Make the monthly or annual payments until you are ready to pass along ownership to your grandchild. In most cases, the grandchild would take over the payments – unless you purchased a 20-pay whole life policy and payments have already stopped.
4. At a date of your choosing (and when they are legal age), transfer the policy to your grandchild. At this point, ownership is now in their name.
5. The beneficiaries on the policy would be updated to the person(s) and/or charitable organization of your grandchild’s choosing.
6. Your grandchild can now access the cash value through a policy loan or withdrawal⁵. Over the course of their lifetime, the cash value may have grown considerably – which can be a huge help if they need help paying for their post-secondary education, a wedding, or a down payment on a home! And even if they decide not to access the cash value, they can rest easy knowing that they’re covered for life, despite any health diagnoses or risky hobbies.

A gift that keeps on giving

Still looking for that special, lasting gift? This just might be it! Contact your advisor to learn more, or fill out this short form to get connected with a Serenia Life advisor near you.

¹According to the rules in subsection 148(8) of the Income Tax Act, the transfer of ownership can be tax free to a child or grandchild as long as there was no consideration paid on the transfer. The proceeds of the disposition for the transfer are deemed equal to the policy’s adjusted costs basis (ACB), resulting in no income tax payable by the policy owner when the transfer is made.

²Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued.

³Dividends are not guaranteed and are paid based on the overall experience of Serenia Life Financial, considering all risk factors. Dividends may be subject to taxation. Dividends will vary based on the actual investment returns in the participating account as well as mortality, expenses, taxes, lapses, withdrawals, and other experience of the participating block of policies. These factors have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.

⁴Illustration only, as of December 2023. Age 0 based on female regular rates, paid up additions dividend option, and on $500,000 initial insurance coverage and current dividend scale. Future performance will be different than illustrated due to the variability of the dividend. All numbers in CDN $. Current annual premium, Age 0: $5,050 payable for 20 years. The policy is “paid up” at Age 20.

⁵Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.