Life Insurance For Babies: Is It Necessary?

Life insurance for children is typically purchased by a parent or guardian as a safety net in the case of their child's death. While it may seem counterintuitive to insure a child's life, there are some benefits to doing so. The two main types of life insurance for children are term life insurance and whole life insurance. Term life insurance covers the child until they reach adulthood, while whole life insurance provides lifelong coverage as long as premiums are paid. Whole life insurance policies also have a cash value component that can be accessed for purposes such as paying college fees. Some companies market children's whole life insurance plans, while others offer child riders that can be added to an adult's policy for a low cost. While life insurance for children can provide peace of mind, it's important to consider the long-term costs and alternative investment options before purchasing a policy.

Pros and cons of life insurance for children

Pros

• Guaranteed insurability: A life insurance policy for a child guarantees that they will have coverage even if they develop a health condition later in life. This is especially relevant for children with a family history of genetic medical conditions or those who take up dangerous hobbies as adults.
• Low rates: Life insurance rates for children are much lower compared to adults, and these rates can be locked in for the duration of the policy.
• Lifelong coverage: Whole life insurance policies for children provide coverage for their entire lives as long as the premiums are paid. This guarantees future insurability and can be transferred to the child when they become an adult.
• Final expenses: In the unfortunate event of a child's death, a life insurance policy can help grieving parents and family members by covering funeral costs and other final expenses.
• Cash value: Whole life insurance policies for children accumulate cash value over time, which can be accessed for various expenses, such as college tuition.

Cons

• Long-term commitment: Whole life insurance policies require a long-term commitment to paying premiums. Cancelling the policy or missing payments may result in a loss of the money invested.
• 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 college savings plans, may offer higher returns over the same period.
• Financial trade-off: The cost of life insurance for a child may limit funds available for other child-related expenses. It is important to consider financial priorities and whether the additional cost aligns with the family's needs and circumstances.
• Limited coverage: Some insurers offer lower coverage amounts for children's life insurance policies, which may not meet the child's needs in adulthood when they have a family of their own.

Whole life insurance for children

However, there are also some drawbacks to consider. Whole life insurance for children may be an unnecessary expense, as children are less likely to die young and the money could be better invested elsewhere. The coverage amounts tend to be low, typically $50,000 or less, and may not meet the child's needs in adulthood. Additionally, the cash benefits offered by these policies may not be the best savings option, as other investment types often provide higher interest rates.

When deciding whether to purchase whole life insurance for your child, it is essential to weigh the benefits against the potential drawbacks and consider your family's unique circumstances and financial situation.

Term life insurance for children

One of the main advantages of term life insurance for children is that it guarantees future insurability. If a child develops a serious medical condition or has a family history of health issues, they may struggle to obtain affordable life insurance as an adult. By purchasing a policy during childhood, parents can lock in lower premiums and ensure their child has coverage regardless of future health issues. Additionally, the cash value of the policy can grow over time, providing the child with a financial resource when they reach adulthood. In the unfortunate event of a child's death, term life insurance can also help cover funeral expenses and provide financial support for grieving parents.

The likelihood of a child's death is low, so purchasing term life insurance solely for the death benefit may not be the best use of a family's financial resources. The coverage amounts tend to be low and may not meet the child's needs later in life, especially if they have a family of their own. Additionally, the rates of return on whole life insurance policies for children are typically low compared to other investment options. Finally, term life insurance for children can be a permanent cost, with long-term premium payments that may become unaffordable over time.

Who should consider buying term life insurance for their child?

Child rider life insurance

A child rider is an add-on to a life insurance policy that pays out a death benefit if one or more of your children passes away. This type of insurance serves as a safety net for parents, allowing them to focus on their family instead of worrying about funeral expenses. Adding a child term rider to your life insurance policy is a cost-efficient way to insure your children's lives without purchasing separate policies for each child.

Here's how child rider life insurance works:

To qualify for this add-on, your child must be between 15 days and 18 years old. The coverage will last until their 25th birthday or your 65th birthday, whichever comes first. When the policy is about to expire, your child can convert the insurance rider into a standalone, individual policy without needing a medical exam or going through the approval process again.

Benefits of Adding a Child Rider

A child insurance rider is an affordable way to make a long-term investment in your family's well-being. Here are some of the benefits:

• One flat-fee rider covers all your children, including future kids.
• It protects your children regardless of their health status, even if they develop a life-threatening condition later in life.
• It can be converted into a permanent policy without a medical exam and regardless of the child's health.
• Coverage remains active even if the child gets married while enrolled.

Drawbacks of Child Rider Life Insurance

While child rider life insurance offers benefits, there are also some drawbacks and limitations to consider:

• To add a child rider, the policyholder (usually the parent) must be between the ages of 20 and 55.
• Qualifying children include unmarried children, stepchildren, or legally adopted children.
• A child rider cannot be used in conjunction with other term riders.
• The accelerated death benefit on the base plan for the insured adult does not extend to the child with the rider add-on.
• The purchase of a child rider is limited to new policies and cannot be added after a policy is in place.
• Coverage may terminate prematurely if the parent reaches a certain age, such as 65 or 55.
• Conversion to a permanent policy can be expensive, and coverage amounts may be limited.

When to buy life insurance for your child

While the primary function of life insurance is to provide financial support to dependents when the head of the household dies, some parents may consider buying life insurance for their children. This is usually a permanent life insurance policy that provides a fixed death benefit to the beneficiary if the insured child passes away while covered.

Pros of buying life insurance for your child

• Guaranteeing future insurability: Buying life insurance for your child guarantees that they will have coverage in the future, even if they develop a health condition or choose a high-risk career. This is especially relevant if your family has a history of genetic medical conditions.
• Locking in lower premiums: The younger the insured person is, the cheaper their premiums will be. Buying life insurance for your child now can lock in these low rates for the future.
• Providing a financial safety net: In the tragic event of a child's death, life insurance can help cover funeral expenses and give grieving parents the financial ability to take time off work.
• Building cash value: Whole life insurance policies contain a savings component that grows over time. This cash value can be borrowed against, used to pay for your child's education, or paid out if the policy is surrendered.
• Long-term savings: Some parents view life insurance as a long-term savings vehicle for their child's future, especially if they anticipate long-term medical issues for their child.

Cons of buying life insurance for your child

• Low rate of return: Whole life insurance policies build cash value over time, but at a low rate of return compared to other investment options.
• Low coverage amounts: Coverage amounts for children's life insurance policies are typically low, usually $50,000 or less. These amounts may not meet your child's needs in the future when they have dependents of their own.
• Permanent cost: Life insurance for your child will require continuous premium payments to keep the policy active. This can be a financial burden, especially if you have other financial priorities or obligations.
• Alternative investment options: There are other ways to save for your child's future, such as 529 college savings plans, mutual funds, or other investment accounts that may offer higher returns.

In summary, buying life insurance for your child can provide peace of mind and guarantee their future insurability. However, it is important to weigh the pros and cons carefully and consider alternative investment options before making a decision.

Frequently asked questions