Insuring Your Child's Future: Life Insurance Options For Parents

Life insurance for children is a heavily debated topic, with some arguing that it is unnecessary due to the low mortality rate among children and the fact that they do not typically generate income. However, there are certain situations where it may be beneficial to insure your child's life. For instance, if your child has a medical condition that will impact them in the long term, or if your family has a history of genetic illnesses that may put your child at risk, insuring their life may be a good idea. This can guarantee their future insurability and provide a financial safety net for you in the unfortunate event of their passing. Additionally, life insurance policies for children often have a cash value component, allowing the policy to act as a long-term savings vehicle for your child's future needs, such as education or a down payment on a home. However, it is important to weigh the pros and cons before making a decision, as there may be better investment alternatives with higher rates of return.

Pros and cons of child life insurance

Pros of Child Life Insurance

• Lower rates: The younger the child, the lower the premium. Buying a policy for a child locks in a lower rate that they can maintain throughout their lifetime.
• Lifelong coverage: Whole life insurance policies guarantee future insurability, even if the child develops a medical condition that would otherwise interfere with coverage options.
• Guaranteed insurability rider and additional riders: Depending on the policy, the child may be able to buy additional insurance for more financial protection when they are older, even if they develop health issues.
• Final expenses: In the event of a child's death, a life insurance policy can help grieving parents and family members by relieving them of funeral costs.
• Financial planning tool: Some whole life insurance policies can serve as a tax-advantaged savings vehicle for future expenses like college tuition or a down payment on a house.
• Peace of mind: For parents and families of children with serious health problems or a high risk of premature death, life insurance can provide peace of mind.

Cons of Child Life Insurance

• Long-term commitment: Whole life insurance policies require paying premiums for many years. If you miss a payment or cancel the policy, you may lose the money you've invested.
• Lower rate of return: Other investment options, such as a tax-deferred college savings plan, may yield a higher rate of return over time.
• Opportunity cost: The money spent on life insurance premiums could be used for other child-related expenses or investments.
• Unnecessary expense: Critics argue that life insurance for a child is often unnecessary since the risk of a child dying is low, and they typically do not have dependents or significant income.
• Better investment alternatives: The cash value in whole life insurance policies often grows at a slower rate compared to other investment vehicles, such as a 529 plan or a high-yield savings account.
• Emotional considerations: Some parents may be uncomfortable with the idea of profiting from a child's death or find the notion of child life insurance distressing.

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 is typically purchased by a parent, guardian, or grandparent. While it is not a top priority for most parents, there are certain situations where it might be worth considering. Here are some factors to help you decide when to buy child life insurance:

Your child's future insurability is important to you:

Child life insurance policies are usually a form of whole life insurance, which provides coverage for the child's entire life as long as premiums are paid regularly. These policies often include or offer a guaranteed purchase option, meaning the child can buy additional coverage without a medical exam, which can be useful if the child develops health issues later in life.

You want to lock in lower premiums:

The younger the insured person is, the cheaper their premiums will be. Insurance companies lock in these low rates, which will not increase over time. This can be especially beneficial if you want to insure multiple children, as the cost of adding more children to an existing policy is usually the same regardless of their age.

You're saving for the future:

Whole life insurance policies contain a savings component called the cash value, which grows over time and can be borrowed against or paid out if the policy is surrendered. Some companies promote these policies as a means of saving for a child's college education, although financial planners advise exploring other investment options first.

Your child is a minor with an income:

In rare cases, you may be dependent on your child's income. For example, 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, you may want to consider child life insurance to protect that income stream.

You have a family history of medical conditions:

If your family has a history of genetic medical conditions, insuring your child at a young age can make sense. This guarantees that your child will have coverage later in life even if they develop a health condition, and it locks in lower rates.

You want to cover final expenses:

While the chances of a child dying are very low, a life insurance policy can provide funds for final expenses and allow grieving parents the financial flexibility to take time off work. This can be a worthy reason to consider child life insurance, especially if you cannot afford these costs otherwise.

Child life insurance vs child riders

Overview

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.

There are two ways to buy life insurance for a child:

• Buy a separate life insurance policy specifically on the child
• When a parent buys life insurance, they can often add a "children's term life insurance" rider.

Child Life Insurance

Child life insurance policies are usually whole life insurance policies. They can provide lifelong coverage as long as premiums are paid. Premiums tend to be guaranteed, so they won't increase over time. Plus, a portion of the premium goes toward building cash value, which can be accessed while the child is alive, for any reason.

Child Riders

A child rider is an "add-on" you can purchase with your life insurance policy that covers the life of your minor children and can also be converted into a permanent policy later in life without the child needing to show evidence of insurability. One rider covers all eligible children (unmarried children, stepchildren, or legally adopted children), including any children born after you buy the rider.

Cost

Child life insurance policies tend to be more expensive than child riders. For example, a child life insurance policy would cost at least $45 per month or more, whereas you can add a $10,000 child rider to your term policy for as little as $4.20 per month.

Coverage

Child life insurance policies typically provide coverage of $50,000 or less, although some insurers can provide coverage of up to $500,000. Child riders, on the other hand, typically offer coverage ranging from $1,000 to $100,000, depending on the insurer.

Age Restrictions

Child life insurance policies can be purchased for children up to a certain age, which varies by insurer but is typically around 14 to 17 years old. Child riders usually cover children only up to a certain age, usually between 18 and 25, after which they need to secure their own insurance or convert the rider into a permanent policy.

Pros and Cons

Both child life insurance and child riders have their advantages and disadvantages. Child life insurance can guarantee insurability and lock in low rates, but it may not be worth the cost for some families, especially if there are other financial priorities. Child riders are generally more affordable and provide guaranteed insurability, but the coverage amount may be lower than what is needed.

In conclusion, both child life insurance and child riders have their benefits and drawbacks. Child life insurance may be more suitable for families who want higher coverage amounts and are willing to pay higher premiums, while child riders may be a more cost-effective option for those who want basic coverage for their children. Ultimately, the decision depends on the family's financial situation, needs, and priorities.

Whole life insurance for children

However, there are some potential drawbacks to whole life insurance for children. The rates of return are typically low, and the coverage amounts may be insufficient for the child's needs later in life. Additionally, the premiums may be a long-term expense, and the policy may not make sense financially if you decide to cancel it early.

When considering whole life insurance for your child, it is important to weigh the pros and cons carefully and ensure that it aligns with your financial goals and priorities. It may be helpful to consult with a financial planner or insurance agent to determine if this type of policy is the right choice for your family.

Alternatives to life insurance for children

Before opting for life insurance for your child, there are a few alternatives you can consider:

• Assess your own life insurance coverage: It is recommended that you ensure you have adequate coverage for yourself first. Your life insurance takes priority as it can help cover your family's living costs and other expenses if something happens to you.
• Build an emergency fund: Instead of paying premiums for your child's life insurance, you could consider putting that money into a savings account to build an emergency fund. This can be useful for covering unexpected expenses, including funeral costs.
• Save for retirement: Another financial priority to consider is saving for your retirement. By contributing to a retirement fund, you can ensure you have sufficient funds to maintain your standard of living during your golden years.
• Pay off high-interest debt: If you have any high-interest debt, such as credit card debt, it may be more beneficial to focus on repaying that debt rather than taking out life insurance for your child.
• Explore other investment options: There are various other investment options available, such as mutual funds, 529 college savings plans, or other types of life insurance policies for adults that offer investment components. These options may provide higher returns than the cash value component of a child's life insurance policy.
• Child term rider: If you still want some form of coverage for your child but don't want a separate policy, you can consider adding a child term rider to your own life insurance policy. This rider can cover multiple children and provide a payout if a child passes away. The rider can usually be converted to permanent coverage when the child becomes an adult.
• Supplemental life insurance through your employer: If your employer offers group life insurance as a benefit, you may be able to purchase supplemental life insurance that covers your spouse and/or children. However, keep in mind that this coverage may be tied to your employment, and you could lose it if you leave your job.

Frequently asked questions