Life Insurance For Children: Is It Worth It?

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. While it is not a common practice, it is possible to purchase life insurance for children. This can be done either as a standalone policy or by adding a child to an adult's existing policy.

Pros of buying life insurance for children

There are several advantages to purchasing life insurance for your child. Here are some pros of buying life insurance for children:

Guaranteed Insurability

Life insurance for children guarantees that your child will have coverage even if they develop a health condition later in life. If your family has a history of genetic medical conditions, it might be a good idea to insure your child, so you don't have to worry about them being denied coverage later on. This is especially beneficial if your child chooses a high-risk career or hobby, as it can be difficult to get life insurance coverage for these activities as an adult.

Locked-in Lower Rates

Buying life insurance for a child locks in a lower rate. The younger the child, the lower the rate will be, and these rates are typically guaranteed for the duration of the policy. This means that even if your child develops health issues later in life, they will still have affordable coverage.

Long-term Savings and Cash Value

A whole life insurance policy for a child can provide lifelong coverage and help with financial planning for the future. A portion of the premium goes towards building cash value, which can be accessed while the child is alive for any reason, such as education or a down payment on a home. The cash value grows tax-deferred, providing a tax-advantaged way to save for your child's future.

Financial Protection for Final Expenses

While the chances of a child dying are very low, a life insurance policy can provide financial protection for final expenses and funeral costs. This can relieve the financial burden on grieving parents and family members during a difficult time.

Cons of buying life insurance for children

• Low rate of return: Whole life insurance policies build cash value, but at a low rate of return. This means that life insurance for a child shouldn't be a substitute for a 529 college savings plan. It usually takes around 15 years for the cash value of a whole life insurance policy to equal the premiums paid. In contrast, investing in a 529 plan could see your money double in 10 years.
• Long-term commitment: Whole life insurance policies typically require you to pay premiums for decades. If your financial situation changes, you may find yourself unable to continue paying the premiums, which would result in the cancellation of the policy.
• Low coverage amounts: Some insurers limit the coverage amount for children's life insurance policies to $50,000. This may not be enough coverage once the child becomes an adult and has a family of their own.
• Financial trade-off: Buying life insurance for a child means giving up money that could be spent on other things to support the child's well-being. Since it is statistically unlikely that a child will die at a young age, your money might be better spent elsewhere.

When to buy life insurance for children

Life insurance for children is not a common practice, but it is an option for parents, grandparents, or guardians who want to ensure their child's future financial security. There are two main ways to purchase life insurance for children: as a standalone whole life insurance policy or as a rider on an adult's existing policy. While it may provide peace of mind for some, there are several factors to consider before purchasing life insurance for a child.

Pros of buying life insurance for children

Pay for end-of-life expenses

Although childhood mortality rates are at historical lows, tragic deaths can still occur. Life insurance can provide financial support to the family, covering medical and funeral costs and allowing parents to take time off work to grieve.

Ensure your child's future insurability

Life insurance for children can guarantee coverage for the child even if they develop health conditions or take up high-risk occupations or hobbies later in life, which may make it difficult to obtain insurance as an adult.

Lock in lower premiums

The cost of life insurance is typically lower when the insured person is younger. By purchasing life insurance for a child, you can lock in lower premiums that will remain stable throughout the policy's life.

Give your child access to cash value

Whole life insurance policies have a cash value component that acts as a savings account. The child can access this cash value when they get older through withdrawals or loans against the policy, providing funds for any purpose.

Cons of buying life insurance for children

Limited coverage amounts

Insurers usually offer lower coverage amounts for children's life insurance policies, typically up to $50,000. This amount may not be sufficient for an adult with dependents.

Low returns on cash value

Whole life insurance policies often provide low rates of return on the cash value component, which may not keep up with inflation rates. Other investment options, such as 529 plans, may offer higher returns for saving for a child's future.

Ongoing premium payments

As with any insurance policy, premiums must be paid regularly to keep the policy in force. Over time, this may become a financial burden, especially if other financial priorities arise.

When to consider buying life insurance for children

Family history of medical conditions

If your family has a history of genetic ailments or medical conditions, purchasing life insurance for your child early on can ensure their future insurability. Once diagnosed with a medical condition, it may become more difficult or expensive for them to obtain coverage later in life.

High-income households

High-income parents may find the idea of transferring wealth to their children through a life insurance policy appealing. The cash value component of whole life insurance policies can provide tax-advantaged growth over time.

Peace of mind

For some parents or guardians, the main benefit of purchasing life insurance for their child is peace of mind. Knowing that final expenses will be covered and that they will have the financial flexibility to grieve if the unthinkable happens can be worth the cost of the policy.

Alternatives to consider

Before purchasing life insurance for a child, it is essential to ensure that you have adequate coverage for yourself and that other financial priorities, such as emergency funds, retirement savings, and debt repayment, are on track. Additionally, there are alternative ways to save for a child's future, such as 529 plans for educational expenses, custodial accounts, or standard investment accounts.

How to buy life insurance for children

Two ways to buy life insurance for children

There are two ways to buy life insurance for children: buying a separate life insurance policy specifically for the child, or adding a "children's term life insurance" rider to an existing policy.

Buying a separate life insurance policy

When buying a separate life insurance policy for a child, you will typically be purchasing a whole life insurance policy. This means that coverage will last for the child's entire life, provided that the premiums are paid. Whole life insurance policies also have a cash value component, which can be accessed while the child is alive, for any reason.

Adding a rider to an existing policy

Some insurers allow an adult policyholder to add a child to an existing term life insurance policy. In this case, full ownership of the policy is transferred to the child once they become an adult. The adult child may then have the option to convert the term life policy into a permanent life policy.

What you need to buy life insurance for a child

To buy a life insurance policy for a child, you will need to provide the child's full name, date of birth, and Social Security number. There may also be a few health-related questions, but unless the child has a chronic medical condition, approval is typically straightforward.

The cost of insuring a child

The younger the child, the cheaper the policy will be. The amount you pay will also depend on the amount of coverage you buy and the type of payment schedule you choose. For example, you may be able to choose a policy that is payable through the child's age of 65 or 100. The further you stretch out the payment schedule, the lower the premium will be.

Who sells children's life insurance?

Many insurers sell standalone children's life insurance policies, including:

• Aflac
• American Family
• Foresters
• Gerber Life
• Globe Life
• Mutual of Omaha

Pros of buying life insurance for a child

• Guarantees insurability: You are guaranteeing that your child will have coverage even if they develop a health condition later in life.
• Locks in a low rate: You will never get a lower rate on life insurance than when a child is a newborn.
• Provides funds for funeral expenses: A life insurance policy will provide funds to cover final expenses in the tragic case of a child's death.
• Has cash value: A portion of the premiums paid for a whole life insurance policy goes towards building cash value, which can be accessed for any reason.

Cons of buying life insurance for a child

• Low rate of return: Whole life insurance policies build cash value at a low rate of return, so they should not be a substitute for a dedicated college savings plan.
• Long-term commitment: Buying a whole life insurance policy means committing to paying premiums for decades.
• Low coverage amounts: Some insurers limit the coverage amount for children's life insurance policies to $50,000, which may not be enough once the child becomes an adult.
• Financial trade-off: Buying life insurance for a child means giving up money that could be spent on other things to support the child's well-being.

Alternatives to buying life insurance for children

Before purchasing life insurance for your child, it is recommended that you ensure you have adequate coverage for yourself. It is also important to address other financial priorities, such as building an emergency fund, saving for retirement, and paying off high-interest debt.

• 529 accounts for educational expenses: These accounts allow you to save for your child's future educational costs, and the funds can be withdrawn tax-free.
• Custodial accounts: These accounts can be used by parents or grandparents to save and invest on behalf of their children or grandchildren. The funds can be withdrawn at any time for the child's benefit, and there are typically no income limits, contribution limits, or withdrawal penalties.
• Standard investment accounts: Depending on your risk tolerance and investment goals, you may consider other types of investment accounts, such as mutual funds or stocks.
• Retirement accounts: Investing in your retirement through a 401(k) or IRA can help ensure that you have sufficient funds during retirement, reducing the financial burden on your children.
• Child life insurance rider: This is similar to a whole life insurance policy for your child but is usually cheaper. It takes the form of add-on term life insurance that can be converted to permanent insurance when your child is older.

Frequently asked questions