How to give the gift of life insurance

Everyone has that one friend or family member who's particularly hard to shop for. They might be picky, have everything they need, or just be the king or queen of returns.

Whatever the reason, they require a little extra thought and creativity when it comes to the holidays. 

If you're stuck on your hard-to-buy-for loved one, a life insurance policy may be an outside-the-box gift to consider. Here's how that works — and why you might want to do it. 

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How to give the gift of life insurance

There are three ways you can give life insurance to a loved one. First, you can purchase a policy for yourself and add them as a beneficiary. In this scenario, you would be the policyholder, and should you pass away, that loved one would receive the death benefits, which they could use for any purpose they wish. 

You could also purchase a policy for both you and someone else simultaneously. This is called a "second-to-die" policy, according to Stephen Dunbar, a financial advisor with Equitable Advisors in Atlanta. 

"One way to buy life insurance for someone else is to purchase a policy on two lives paid for by either the one giving the gift or paid for by the one receiving the gift," Dunbar says. "An example of this would be one parent taking out a life insurance policy on themselves and the other parent. Both parents will be covered under the policy. After they both pass, the death benefit would be paid to the beneficiaries."

The other option is to purchase life insurance with your loved one as the policyholder. This is a little more complicated, as you'd likely need their input — or at least their personal details and some health information. You will also need to go through a validation process to prove you have an "insurable interest" in the beneficiary. 

"This process is to validate the purpose behind the purchase and to ensure there isn't fraud. There must be a direct tie between the individuals — for example, husband and wife, business partners with ties to loans or other financials, a parent and child, etc," Samantha Chow, global leader for life, annuities, and benefits at business consulting firm Capgemini, says. 

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Why give life insurance this holiday season?

It might seem like an unconventional gift, but giving your loved one a life insurance policy — either one that pays them upon your death or that pays their loved ones on their own — can come with many benefits.

These include: 

It offers peace of mind

One reason to gift your loved one a life insurance policy is that it can give them peace of mind. They'll know they're protected in case the unthinkable occurs, and they'll have confidence they can get by no matter what.

As Roger Fishel, a financial advisor at Roger Fishel Financial in Kissimmee, Florida, puts it, "It helps safeguard the financial well-being of your loved ones in the event of an unfortunate loss within the family."

Beneficiaries can use life insurance payouts to cover anything — funeral expenses, end-of-life medical bills, or even as a replacement for income if the household loses a breadwinner. It can also help pay off outstanding debts the deceased left behind (like a mortgage, for instance) or cover estate taxes. 

You can lock in low rates

Another perk to gifting life insurance is that, if you choose the right type of policy, you may be able to purchase coverage for the policyholder's entire life — and at today's rates, not those decades down the line. 

With whole life insurance policies, for example, you may have the option to pay for your entire policy premium upfront. This would mean no renewals or premium increases required, and your loved one would enjoy coverage until they pass away, even if that's decades down the road. 

This strategy also works when buying policies on behalf of children, as life insurance tends to be much more affordable at younger ages. 

"When you buy life insurance for a young child, you can usually lock in a low premium," says Tim Hoolihan, a licensed life insurance agent at Assurance IQ. "Typically, people buy their kids whole life policies that grow cash value over time. In the future, the child could choose to cash out the policy to help pay for life milestones like college or a down payment on their first home or they could retain the policy as life insurance into adulthood."

You can provide a financial safety net

Life insurance can also be an investment tool. Depending on the type of policy you choose, they may have a cash value you can withdraw from, or you may be able to borrow against them should you need money in a pinch or want to cover a large expense. 

This can offer your loved one a strong financial safety net should something go awry. It can also serve as an option for extra income in retirement. 

"Permanent life insurance options, such as whole life, universal life and variable universal life, serve multiple purposes," Chow says. "They not only offer financial relief but can also function as an investment vehicle with cash value that can be utilized in retirement or to support you in the now while you are living."

You can protect their business

If your loved one owns a business, a life insurance policy could also be helpful. For one, it can help them (or their dependents) pay off outstanding business debts they might leave behind. It can also help safeguard the company's success as it's handed down to heirs.

"A person may purchase a life insurance policy on the life of a key employee or business partner. This is often done to protect the business from financial losses that could result from the unexpected death of that individual. The policy proceeds can be used to cover business debts, fund a buy-sell agreement, or provide liquidity for the business during a transitional period," Fishel says.

You can provide for the next generation

Buying a policy for a child in your life is a great way to provide some financial assurance for their future. For one, it can give them wealth to pull from — to buy a house, to cover college costs or for anything else they might need down the line. 

"A parent or grandparent can purchase a life insurance policy on the life of their child or grandchild," Dunbar says. "The purpose of this strategy is building up a tax-free asset that the child or grandchild will be able to use in the future."

Insuring a child early — with a permanent life insurance policy, at least — can also ensure they're covered for the long haul, despite what health problems may develop.

"Many life insurance policies for kids will guarantee that they can purchase additional coverage later in life, without going through medical underwriting," Hoolihan says. "This is helpful in case the child develops health issues as they get older, because they won't have to go without life insurance."

Shop around for your policy

If you do opt to purchase a life insurance policy for a loved one this holiday season, make sure you compare carriers. Pricing for life insurance can vary quite a bit, and some policies tend to be more expensive than others (whole life insurance is more expensive than term life insurance, for example). 

You can also enlist the help of an independent insurance agent, as they can help you pick the insurance company that's best for your budget and goal. "Everyone has unique needs, and there are many different types of life insurance policies and riders that may work for you. An agent can help streamline the process of getting quotes, navigating the application, and ensuring the policy meets your needs," Hoolihan says.