Life Insurance For Children: Is Term Coverage An Option?

Life insurance for children is a topic that stirs up strong emotions for parents, and marketers know it. While the idea of something happening to your child is terrifying, the reality is that child life insurance is not always necessary. In fact, it is often marketed as a way to save for your child's future, but there are usually better ways to do this. However, there are some instances where it may be beneficial to get term life insurance for your child.

Child life insurance pros and cons

Pros

• Guaranteed Insurability: Child life insurance policies typically include or offer a guaranteed purchase option. This means that the child can buy additional coverage without a life insurance medical exam, which can be useful if the child develops a chronic health condition.
• Acts as a Savings Vehicle for your Child: Money can be withdrawn from the cash value account or borrowed against it. The money can help cover costs like school fees or a down payment on a child's first home. It also grows tax-deferred.
• Covers Costs: Child life insurance policies pay out a lump sum in the event of a child's death, which can be used for expenses like burial costs or grief counselling.
• Lower Rates: When you buy insurance for a young child, the rate will be substantially lower than for an older child or young adult.
• Lifelong Coverage: When you buy a whole life insurance policy for a young child, you are guaranteeing future insurability.
• Final Expenses: Having a life insurance policy in force can help grieving parents and family members by relieving them of funeral costs.

Cons

• Low Coverage Amounts: Coverage amounts tend to be low, often under $50,000, and may not meet your child's needs later in life.
• Expensive Long-Term Commitment: Whole life insurance policies are usually significantly more expensive than term life insurance policies.
• Low Rate of Return on Investment: It could be a decade or two before the policy accumulates enough cash value to equal the amount you've paid in premiums.
• Sacrifice Investment in Other Savings Accounts: If setting up savings for your child is your main goal, you may want to consider other types of investments first.
• Chances of a Child Dying are Very Low: It's uncommon for a child to die in the US, so the risk of going without coverage may not outweigh the cost of the policy.

Whole life insurance for children

Pros

• Guaranteed future insurability: The policy can be continued into adulthood, regardless of the child's future health or occupation, which can be especially advantageous if the child develops a serious medical condition or chooses a risky career.
• Locked-in, low premium rates: Whole life insurance for children allows parents or guardians to lock in low premium rates that will remain the same throughout the life of the policy.
• Accumulation potential: Unlike most gifts, a whole life insurance policy accumulates cash value over time, which can be used for various purposes, such as a down payment on a home, college tuition, or retirement funding.
• Tax advantages: Under current law, the cash value accumulated in a whole life insurance policy is tax-deferred, and there are typically no tax consequences when accessing the cash value. Additionally, the death benefit received by beneficiaries is usually non-taxable.
• Guaranteed coverage: Whole life insurance for children provides guaranteed coverage for the child's entire life, as long as the premiums are paid.
• Opportunity to add more coverage: Whole life insurance policies often allow for the addition of more coverage in the future, which can be beneficial if the family's financial situation changes.
• Potential to cover funeral expenses: While the chances of a child dying are very low, a whole life insurance policy can help cover funeral expenses and other end-of-life costs.

Cons

However, there are also some potential drawbacks to consider:

• Expensive long-term commitment: Whole life insurance policies for children can be expensive in the long term due to the lifelong premium payments.
• Low rate of return: Children typically have lower mortality rates, which can result in a poor rate of return on whole life insurance plans.
• Limited payout amounts: Whole life insurance policies for children usually have low coverage amounts, which may not meet future life insurance needs.
• Sacrifice investment in other savings accounts: The money spent on whole life insurance premiums could potentially be invested in other savings accounts or investment opportunities with higher returns.

In summary, whole life insurance for children can provide peace of mind and guaranteed coverage, but it is important to carefully consider the pros and cons before purchasing a policy. It may be more beneficial to set up a savings account or invest in other types of insurance, such as term life insurance with a child rider.

Child riders

To qualify for this add-on, your child needs to 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 stand-alone, individual policy without needing a medical exam or going through the approval process again.

The death benefit is a tax-free lump sum payment that can be used for any purpose, such as funeral expenses or income loss from an extended leave of absence from work. One flat-fee rider covers multiple children, including future children, regardless of their health status.

The cost of a child rider is generally low, at around $50 per year for a $10,000 child rider. A child term rider will typically add an additional $5 to $7 per $1,000 of coverage per year to your policy premium. For example, a rider with a $25,000 death benefit would cost around $10.94 per month.

While child riders are a good option for those seeking a straightforward and affordable way to insure their children, they do have some limitations. The coverage amount is usually limited to $25,000 or less per child, and the rider will terminate if the parent who is the policyholder reaches a certain age, typically 65.

Alternatives to child life insurance

Child life insurance is generally unnecessary unless your child has a disability or is at high risk due to illness. Here are some alternatives to consider:

• Add a child rider to your own policy: You can add a child term rider to your own life insurance policy, which will cover all the children in your household for a small fee. This is a cheaper and simpler option than buying a separate policy for your child. The rider can usually be converted into a permanent policy when the child becomes an adult.
• Supplemental life insurance through your employer: Some employers offer supplemental life insurance as a benefit, which may include coverage for spouses and/or children.
• Set up a savings plan: Rather than paying premiums for a policy you may not need, you could invest that money in a savings plan for your child's future expenses. Options include 529 savings plans, custodial accounts, and IRAs.
• Emergency fund: Instead of paying insurance premiums, consider putting that money into an emergency fund. By saving three to six months' worth of living expenses, you can cover funeral costs or other unexpected expenses.

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 necessary in most cases, there are certain situations in which buying child life insurance may be a good idea. Here are some factors to consider when deciding if and when to buy child life insurance:

Your Child's Income

In most cases, buying life insurance for a child is unnecessary since parents don't rely on their children financially. However, if your child is an actor, model, or social media star bringing in a substantial income that you depend on, then it may be worth considering life insurance for them.

Your Child's Health and Family History

If your child has a disability or is at high risk due to illness, buying a whole life insurance policy for them can ensure they have coverage later in life, regardless of their health condition. This is especially relevant if there is a family history of serious medical conditions that develop early in life.

Your Financial Situation and Goals

Child life insurance can serve as a savings vehicle for your child, allowing them to build cash value over time. However, the rate of return on these policies is typically low compared to other investment options. If your primary goal is to save for your child's future, consider alternative investment options first, such as a 529 plan, a custodial account, or an IRA.

Your Own Life Insurance Coverage

Before purchasing life insurance for your child, assess your budget and your own life insurance needs. In general, your own life insurance is more important because it can help cover your family's living costs if something happens to you. Ensure that you have adequate coverage for yourself before considering a policy for your child.

Peace of Mind

While the chances of a child dying are very low, losing a child is extremely painful and may incur unexpected costs. Child life insurance can provide peace of mind and help cover funeral expenses and other costs associated with bereavement.

Affordability and Budget

Consider your financial priorities and obligations when deciding whether to purchase child life insurance. If you have limited funds, alternative savings options or a rainy-day savings account may be a better choice.

In summary, while child life insurance is not necessary for everyone, there are certain situations in which it may be beneficial. Assess your family's unique circumstances, financial goals, and budget to determine if and when purchasing child life insurance is the right choice for you.

Frequently asked questions