Life Insurance For Babies: Is It Possible?

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 and grows over time. The two main types of life insurance for children are term life insurance and whole life insurance. While term life insurance offers the most protection for the lowest cost, some people gravitate towards whole life insurance because it doubles as a tax-advantaged savings vehicle.

Pros of buying life insurance for a baby

While it may seem counterintuitive to purchase life insurance for a baby, there are some advantages to doing so. Here are some of the pros of buying life insurance for your child:

• Guaranteeing insurability: By purchasing life insurance for your child, you are guaranteeing that they will have coverage even if they develop a health condition later in life. This is especially relevant if your family has a history of genetic medical conditions.
• Locking in a low rate: The younger the insured person is, the lower the insurance rate will be. Buying life insurance for a newborn locks in this low rate, which will remain the same throughout the duration of the policy.
• Providing funds for funeral expenses and other final expenses: While the chances of a child dying are very low, a life insurance policy can provide funds to cover funeral costs and other final expenses in the unfortunate event of a child's death. This can give the family financial flexibility to take time off work and grieve.
• Accumulating cash value: Whole life insurance policies for children accumulate cash value over time, which can be accessed for any reason. This can be a way to save for your child's future, such as for college or a down payment on a home.
• Transferring wealth: For high-income parents, life insurance can be a way to transfer wealth to their children.
• Peace of mind: Having life insurance for your child can provide peace of mind and help you feel more prepared for the future.

It's important to note that life insurance for children is not always the best financial decision, and there are some cons to consider as well. Additionally, the primary purpose of life insurance is to provide financial security for dependents, and babies typically do not have dependents. As such, it is essential to carefully consider your own financial situation and priorities before purchasing life insurance for your child.

Cons of buying life insurance for a baby

• Low rate of return: Whole life insurance policies accrue cash value over time, but at a low rate of return. Therefore, life insurance for a child should not be a substitute for a 529 college savings plan.
• Long-term commitment: Whole life insurance policies require premium payments for decades. If cash flow becomes tight, it may not be worth continuing payments.
• Low coverage amounts: Some insurers limit coverage for children's life insurance policies to $50,000, which may not be sufficient for an adult with a family to support.
• Financial trade-off: Buying life insurance for a child means giving up money that could be used for other aspects of the child's well-being, such as education or extra-curricular activities.
• Low likelihood of necessitating a death benefit: Children have a low probability of dying young, so the money spent on life insurance could be better allocated elsewhere.
• Low cash benefits: While life insurance policies for children offer cash benefits, other investment types typically offer higher interest rates.

Types of life insurance for a baby

There are two main types of life insurance for children: term life insurance and whole life insurance.

Term Life Insurance

Term life insurance provides coverage for a fixed period, such as 10 or 20 years. If the insured outlives the term, the policy expires without paying out. However, the owner may be able to renew it or convert it to whole life coverage. Term life insurance for children is usually offered as a rider on an adult's policy.

Whole Life Insurance

Whole life insurance provides coverage for the child's entire life, as long as the premiums are paid. It also includes a cash value component that grows over time and can be accessed for purposes such as paying college costs. Whole life insurance policies are more expensive than term life policies but offer more benefits, such as guaranteed coverage into adulthood and the ability to build cash value.

When to buy life insurance for a baby

It's understandable that the idea of buying life insurance for a baby may not be a priority for many parents or grandparents. However, there are some advantages to doing so, and it can be a good decision depending on your family's financial situation and medical history. Here are some factors to consider when deciding if and when to buy life insurance for your baby:

Financial Protection

The primary purpose of life insurance is to provide financial protection for dependents in the event of the policyholder's death. In the case of a baby, no one depends on their income, so the need for life insurance may seem unnecessary. However, life insurance for a child can still offer some financial benefits:

• End-of-life expenses: Life insurance can cover burial procedures, funeral costs, and unreimbursed medical expenses if a child passes away. These expenses can range from \$7,000 to \$12,000, and life insurance can help alleviate the financial burden during an already difficult time.
• Savings for the future: Some whole life insurance policies for children have a cash value component that grows over time. The policy ownership can be transferred to the child when they reach adulthood, and they can choose to continue the coverage or cash out the policy. This can provide a financial cushion for future life events, such as college expenses or a down payment on a home.
• Guaranteed insurability: Buying life insurance for your baby can guarantee their insurability later in life, even if they develop health conditions or choose a high-risk career or hobby. As an adult, they may have difficulty obtaining life insurance or face higher premiums due to increased health risks.
• Low premiums: The younger the insured person is, the lower the life insurance premiums will be. By purchasing life insurance for your baby, you can lock in these low rates, ensuring they have inexpensive coverage as they grow older.

Family Medical History

If your family has a history of genetic medical conditions or your baby already has a long-term medical condition, purchasing life insurance for your baby may be a wise decision. This can ensure that your child remains insurable in the future, even if their health status changes. It also provides financial protection in case your child requires long-term medical care.

Alternative Options

Before purchasing life insurance for your baby, it's essential to consider alternative options for saving for their future. Some alternative investment options include:

• 529 college savings plans
• Bank savings accounts
• Mutual funds
• Custodial accounts
• Standard investment accounts

Additionally, it's crucial to prioritize your own life insurance and ensure that you have sufficient coverage for yourself and your family. Life insurance for a baby is generally considered a supplementary option and may not be the best use of your financial resources if you have limited funds.

In summary, buying life insurance for a baby can offer some financial benefits and peace of mind, especially if your family has specific medical concerns or you want to guarantee their future insurability. However, it's important to weigh the pros and cons, consider alternative investment options, and ensure that your own life insurance needs are met first.

How much life insurance does a baby need

While it may seem counterintuitive to take out life insurance on a newborn, there are some advantages to doing so. The primary function of life insurance is to provide funds to dependents when the head of the household dies. However, no one depends on a baby financially, so life insurance for a baby may be unnecessary.

However, a baby can be insured, and there are some reasons why you might want to consider it.

The amount of life insurance you take out for a baby depends on your personal circumstances and what you want to achieve with the policy.

Burial Expenses

If you want to cover burial expenses, you should consider the average cost of a funeral. As of 2023, burial procedures and expenses range between $7,000 and $12,000. The average funeral with burial costs up to $9,000 or more, so a death benefit of around $10,000 would cover these expenses.

Medical Expenses

The death benefit could also compensate parents for any unreimbursed medical expenses related to a long-term illness. In this case, you should consider the potential costs of treating a long-term illness.

Future Savings

If you want to use the policy as a savings vehicle for your child's future, you should consider the potential returns on the cash value of the policy. Whole life insurance policies build cash value over time, and this can be withdrawn or borrowed against by the policyholder. However, it's important to note that the returns on whole life insurance policies tend to be low compared to other investment options.

Coverage for High-Risk Careers

If you want to ensure your child has coverage if they choose a high-risk career, you should consider the potential cost of coverage for someone in a dangerous profession. For example, a 30-year-old male nonsmoker in Florida can obtain a $100,000 term life policy for about $9 per month. A whole life policy with the same death benefit would cost $50 per month or more.

Factors to Consider

When deciding how much life insurance to take out for your baby, you should also consider the following:

• Your budget and financial priorities: Life insurance for a child is an added expense, and you may have other financial goals, such as saving for retirement or paying off debt.
• Alternative investment options: There are other ways to save for your child's future, such as 529 college savings plans or mutual funds, which may offer higher returns.
• The likelihood of payout: It is unlikely that your child will die young, so you may never receive a death benefit payout from the policy.
• The cost of premiums: While premiums for children's life insurance policies are generally low, they can still be a financial burden, especially if you have other obligations.
• The potential for low coverage in the future: Coverage amounts for children's life insurance policies tend to be low, typically less than $50,000, and may not meet your child's needs in adulthood.

The amount of life insurance you need for your baby depends on your specific needs and goals. If you're primarily concerned with burial expenses, a policy with a death benefit of around $10,000 should be sufficient. If you're looking to build savings for your child's future, you should consider the potential returns on the policy's cash value and compare it to other investment options. Additionally, if you want to ensure coverage for your child in high-risk careers, you should consider the potential cost of coverage for dangerous professions. Finally, it's important to weigh the cost of the policy against your budget and alternative investment options, as well as the likelihood of needing a payout.

Frequently asked questions