Understanding Life Insurance Funds For Children

Life insurance for children is a permanent life insurance policy that provides a fixed death benefit to the beneficiary if the insured child passes away while covered. It is usually purchased by a parent or guardian as a safety net in case of the child's death. While it is not necessary in most cases, it can be useful if the child has a disability or is at high risk due to illness. The policy can also be used as a long-term savings mechanism, as it typically includes a cash value component that grows over time.

Pros and cons of child life insurance

Pros

Child life insurance can be a sensitive topic, but it's important to weigh the potential benefits and drawbacks to make an informed decision. Here are some advantages, or "pros," of purchasing life insurance for your child:

• Lower rates: The younger the child, the lower the premium. Buying a policy for your child early on can lock in a lower rate that they can maintain throughout their lifetime.
• Lifelong coverage: A whole life insurance policy provides coverage for your child's entire life, even if they develop a medical condition later on that would otherwise interfere with their coverage options as adults.
• Guaranteed insurability: A policy purchased for a child guarantees their future insurability, meaning they will be able to secure additional coverage as they grow older, regardless of their health status.
• Final expenses: In the unfortunate event of a child's death, life insurance can help grieving families cover funeral costs and other final expenses, allowing them to focus on their healing process.

Cons

Now, let's explore some disadvantages, or "cons," of child life insurance:

• Long-term commitment: Purchasing a whole life insurance policy for your child means committing to paying premiums for an extended period. If you miss payments or cancel the policy, you may lose the money invested.
• Lower rate of return: Life insurance policies for children may yield lower returns compared to other investment options, such as a tax-deferred college savings plan or other investments with potentially higher rates of return.
• Opportunity cost: The money spent on life insurance premiums could be used for other child-related expenses or investments that better align with your family's priorities and financial goals.
• Unnecessary for most: Critics argue that life insurance for children is often unnecessary, as the likelihood of a child's death is rare, and they typically do not have dependents relying on their income.

When to get life insurance for your child

Life insurance for children is a permanent life insurance policy that provides a fixed death benefit to the beneficiary if the insured child dies while covered. It can also be used as a long-term savings mechanism, as the policy typically includes a cash value component that grows over time.

There are two ways to buy life insurance for a child: as a separate whole life policy or as an add-on (rider) to a parent's term or permanent life insurance policy.

• Your child has a disability or is at high risk due to illness: If your child has a disability or a serious health condition, buying a whole life insurance policy can ensure they have coverage throughout their life. It may be difficult for them to get their own policy later on due to health issues.
• You have a family history of serious medical conditions: If your family has a history of genetic medical conditions that can develop early in life, buying life insurance for your child can guarantee their insurability and lock in lower rates.
• Your child is an income earner: If your child is an actor, model, or social media star bringing in a substantial income, or if they are a teenager working part-time to contribute to household expenses, then getting life insurance for them may be a good idea.
• Your child cares for younger siblings: If your child takes on significant caregiving responsibilities for their younger siblings, you may want to consider life insurance for them. This is especially relevant if you would need to outsource care in their absence.
• You want to lock in lower premiums: Life insurance rates increase with age. Buying a policy for your child when they are young will lock in lower premiums for their lifetime, as long as premiums are paid regularly.
• You want to save for the future: Whole life insurance policies contain a savings component called the cash value, which grows over time. This can be borrowed against or paid out if the policy is surrendered. However, note that the rate of return on these policies is typically low compared to other investment options.

Types of child life insurance policies

There are two main ways to insure a child: purchasing a standalone whole life or term life insurance policy for the child, or insuring the child under a rider as part of the parent's or guardian's own life insurance policy.

Standalone Child Life Insurance Policies

Standalone child life insurance policies are permanent policies that remain in force throughout the child's life, as long as the premiums are paid. These policies are typically whole life insurance policies, which means they build cash value over time. The cash value can be accessed by the policyholder for any reason, such as to cover school fees or a down payment on a home. However, withdrawing money from the cash value account may trigger a tax bill and reduce the death benefit.

Whole life insurance policies for children tend to have low coverage amounts, often under $50,000, and the premiums are locked in and do not increase over time. The younger the child is when the policy is purchased, the cheaper the premiums will be. Standalone child life insurance policies are generally more expensive than adding a rider to an adult's policy.

Some insurers, such as Aflac, also offer term life insurance policies for children, which are less expensive than whole life policies but do not build cash value.

Child Riders

Child riders are add-ons to an adult's life insurance policy that provide supplemental coverage for all the children in the household for a small fee. Child riders typically provide coverage for all current and future children in the family, including adopted and step-children, up to a certain age. The coverage limits generally max out at $25,000, but some companies allow the rider to be converted to a permanent policy worth up to five times the rider's face amount once the child reaches adulthood.

Child riders are a simpler and more affordable option than standalone child life insurance policies, and they can provide peace of mind in the event of the unthinkable happening to a child.

Cost of child life insurance

The cost of insuring a child depends on several factors, including age, gender, coverage amount, policy type, health history, and the insurance company. The younger the child, the cheaper the policy will be. Whole life insurance policies for children are typically more expensive than term life insurance policies, but they offer lifelong coverage and allow the child to purchase additional coverage as an adult. The average annual premium for a $25,000 policy on a newborn is $166. The monthly cost of Mutual of Omaha's children's life insurance for various coverage amounts and ages ranges from $112.39 to $750.05 for males and $88.77 to $561.93 for females.

When buying a life insurance policy for a child, it's important to consider the internal fees and the policy's future performance, rather than just the cost. The policy's cash value will grow over time, and this can be accessed by the child for any reason. However, the rate of return on whole life insurance policies is typically low compared to other investments, such as a 529 college savings plan.

There are alternative options to buying a separate life insurance policy for a child. One option is to add a child rider to your own life insurance policy, which will cover all the children in the household for a small fee. Another option is to set up a savings plan, such as a 529 savings plan, a custodial account, or an IRA, which can be used to cover the child's future expenses.

Who should get life insurance for their children?

In most cases, life insurance for children is unnecessary since parents don't rely on their children for income. However, there are some situations in which it may be beneficial to take out a policy on your child.

Your child has a disability or is at high risk due to illness

If your child has a disability or is at high risk of developing a serious illness, you can buy a whole life insurance policy for them. This will cover them for their entire lives, provided the policy remains active.

You have a family history of serious medical conditions

If your family has a history of genetic medical conditions that are likely to develop early in life, you may want to consider insuring your child. This will guarantee that your child will have coverage even if they develop a health condition later on.

Your child is an actor, model, or social media star

If your child is bringing in a substantial income, you may want to consider taking out a life insurance policy on them. This will provide a financial safety net for your family if your child dies.

Your child is a teenager working part-time

If your child is contributing to household expenses, you may want to consider taking out a life insurance policy on them. This will provide financial protection for your family if your child dies.

Your child looks after younger siblings

If your child is providing a significant amount of childcare for their younger siblings, you may want to consider taking out a life insurance policy on them. This will allow you to outsource this care if your child dies.

In general, it is more important to have your own life insurance policy than to have a policy on your child. Your policy can provide financial protection for your family if you die, including covering your family's living costs and other expenses.

Frequently asked questions