How To Add Your Children To Your Life Insurance

Life insurance for children is a topic that raises many questions for parents and guardians. While it may seem unnecessary to insure a child's life when they are not the primary breadwinners, there are several reasons why it could be beneficial. Child life insurance is typically purchased as a whole life insurance policy, which means coverage lasts for the child's entire life as long as the premiums are paid. This type of policy also has a cash value component that grows over time and can be used for various expenses later in life, such as a down payment on a home or college tuition. The policy can be owned by the parent or guardian until the child reaches adulthood, at which point they can take over premium payments and choose their beneficiary. While term life insurance for children is rare, some companies offer parents with term policies a child term rider, which provides a small amount of coverage for final expenses. When considering life insurance for children, it's important to weigh the pros and cons to make an informed decision.

Pros of child life insurance

While the idea of purchasing life insurance for a child may seem counter-intuitive, there are several benefits to doing so. Here are some pros of child life insurance:

• Guaranteed Insurability: Child life insurance policies typically include or offer a guaranteed purchase option, meaning the child can buy additional coverage without a medical exam. This can be useful if the child develops a chronic health condition or chooses a risky career, as they will still be able to secure life insurance coverage.
• Low Rates: Life insurance rates for children are significantly lower than for adults, and these low rates can be locked in for the duration of the policy. This can result in substantial savings over the lifetime of the policy.
• Lifelong Coverage: Whole life insurance policies for children provide coverage for their entire lives, as long as premiums are paid. This guarantees future insurability, even if the child develops health issues later in life.
• Savings Vehicle: Child life insurance policies often have a cash value component that grows over time. The money can be used to cover costs such as school fees or a down payment on a home. Additionally, the cash value grows tax-deferred, meaning taxes on gains are not paid until withdrawal.
• Final Expenses: While the chances of a child dying are very low, a life insurance policy can provide funds for funeral expenses and other final costs. This can be a financial burden during an already difficult time.
• Grief Support: The payout from a child life insurance policy can also help cover the costs of grief counseling or allow parents to take time off work to mourn.
• Additional Riders: Some child life insurance policies offer guaranteed insurability riders, which allow for the purchase of additional coverage once the child reaches a certain age or life milestone.

These are some of the key pros of child life insurance. It is important to carefully consider your family's financial situation and needs before deciding whether to purchase child life insurance.

Cons of child life insurance

While child life insurance policies can be beneficial in some cases, there are several drawbacks to consider. Here are some of the most common disadvantages:

• Long-term commitment: Child life insurance policies typically require a long-term commitment to paying premiums. If financial circumstances change and you can no longer afford the premiums, you may end up losing the money already invested in the policy.
• Low rate of return: Whole life insurance policies for children may take a decade or more to accumulate enough cash value to equal the amount paid in premiums. Other investment options, such as a 529 college savings plan, could provide higher returns over the same period.
• Limited funds for other expenses: The cost of child life insurance premiums may impact your ability to pay for other child-related expenses. It's important to consider whether the additional cost aligns with your financial priorities and needs.
• Healthy young adults may find similar coverage: If your child remains healthy into their early 20s, they are likely to secure competitive life insurance rates as a young adult. In this case, you may have paid for coverage that wasn't necessary.
• Limited coverage: The coverage amount for child life insurance is usually limited to $25,000 or $50,000 per child. This may not be sufficient to cover outstanding medical bills or replace income for grieving parents.
• Premature termination: While child life insurance policies typically provide coverage until the child reaches the age of 22 or 25, the parent's age may also affect the length of coverage. Some insurers will terminate the rider once the parent reaches a certain age, such as 65 or 55.
• Limited conversion amounts: If your child wants to convert the term rider to their own policy, they may be limited in the amount of coverage they can obtain. The maximum benefit may not be sufficient to meet their needs as an adult.
• Expensive conversion to a permanent policy: Converting a term rider to a permanent policy without underwriting can result in a higher rate than if the child applied for coverage on their own as a healthy adult.

When to buy child life insurance

Child life insurance 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.

• Your child has a substantial income: If your child is an actor, model, or social media star bringing in a substantial income, you may want to consider buying child life insurance. This can help protect their financial future and provide security for your family.
• Your child has medical issues: If your child has a chronic health condition or a family history of medical issues, buying child life insurance can guarantee their future insurability. It may be difficult for them to get life insurance as an adult if they develop health problems later in life.
• You want to lock in lower premiums: Life insurance premiums are typically lower for younger individuals. By buying child life insurance, you can lock in lower rates that will remain the same throughout the policy's duration.
• You're saving for the future: Whole life insurance policies for children often include a savings component called the cash value, which can be borrowed against or paid out if the policy is surrendered. This can be a way to save for your child's future, such as college education.

However, it's important to note that child life insurance is not necessary for everyone. Here are some scenarios where it may not be the best option:

• Alternative savings options: There are other investment options available, such as bank savings accounts, mutual funds, or 529 college savings plans, which may offer higher returns than the cash value component of a life insurance policy.
• Low death benefits: Death benefits for child life insurance policies are typically $50,000 or less, which may not meet your child's future needs.
• Affordability: Consider your financial priorities and obligations before purchasing child life insurance. If you're struggling to afford the premiums, there may be other areas where your money could be better spent.

How to buy child life insurance

Overview

Child life insurance covers the life of a minor and is typically purchased by a parent, guardian or grandparent. It 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.

Buying Options

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

Standalone Whole Life Policy

Whole life policies for children are available to buy while they are minors, but they provide lifelong coverage as long as premiums are paid. Coverage amounts tend to be low, often under $50,000, and premiums are locked in, meaning they won't increase.

Rider to a Parent's or Guardian's Policy

A child life insurance rider typically provides a small amount of term life insurance on a child. It can be added to a parent's or guardian's term or permanent life insurance policy. One rider will cover all of your children, and coverage usually lasts until the child reaches the age limit (typically 22 or 25) or gets married, whichever comes first.

Cost

The cost of a child life insurance rider is relatively low. It generally adds an additional $5 to $7 per $1,000 of coverage per year to your policy premium. For example, a $25,000 policy at $7 per $1,000 of coverage would cost $175 a year, or about $14.58 a month.

Pros and Cons

Pros

• It guarantees future insurability for your child, even if they develop a chronic health condition or choose a risky career.
• It acts as a savings vehicle for your child, as you can withdraw money from the cash value account or borrow against it.
• It covers costs if the worst happens, such as burial costs or grief counselling.

Cons

• It is relatively uncommon for a child to die, so the risk of going without coverage may not outweigh the cost of the policy.
• Coverage is usually low and may not meet your child's needs later in life.
• Cash benefits are often promoted as a savings vehicle, but other investment types typically have higher interest rates.

Who Should Consider Buying Child Life Insurance?

• Those who want to lock in lower premiums. Insurance companies lock in low rates for policyholders at the time of coverage and will not increase them over time.
• Those who want to save for the future. Whole life insurance policies contain a savings component, which is called the cash value. This grows over time and can be borrowed against or paid out if the policy is surrendered.
• Those with a family history of medical conditions that may make getting a policy more challenging or expensive once diagnosed.

Who Should Not Consider Buying Child Life Insurance?

• Those who have alternative ways to save for their child's future, such as bank savings accounts, mutual funds or 529 college savings plans.
• Those who cannot afford the premium.
• Those who feel that their money would be better spent elsewhere, as children are less likely to die young and necessitate a death benefit.

Child life insurance alternatives

Child life insurance is not always necessary, and there are alternative ways to save for your child's future. Here are some options to consider:

• Savings Accounts: You can opt for traditional savings accounts, which offer a safe and secure way to grow your child's savings over time. The money in these accounts is easily accessible and can be used for various expenses, such as education or a down payment on a home.
• Mutual Funds: If you are willing to take on more risk, mutual funds offer the potential for higher returns. These investments pool money from multiple investors and are managed by professionals, investing in stocks, bonds, and other securities.
• 529 College Savings Plans: These plans are specifically designed to save for your child's education. They offer tax advantages and can be a great way to save for future college or university expenses.
• Variable Life Insurance for Adults: Some life insurance policies for adults, such as variable life insurance, have investment components. These policies can serve as both insurance and investment vehicles, providing death benefits and the potential for growth through various investment options.
• Other Investment Options: Depending on your risk tolerance, you can explore other investment types, such as stocks, bonds, or real estate. These options may offer higher returns but also carry varying levels of risk.
• Group Life Insurance: If your employer offers group life insurance as a benefit, you may be able to add supplemental coverage for your child. This can be a cost-effective way to provide some protection without the need for a separate policy.

Remember, the decision to purchase child life insurance depends on your financial situation, family medical history, and personal preferences. It's always a good idea to consult a financial planner or advisor to determine the best options for your specific circumstances.

Frequently asked questions