Life Insurance For Children: A Smart Financial Move?

Life insurance for children is a topic that raises many questions for parents and guardians. The primary purpose of life insurance is to provide financial security for loved ones in the event of the policyholder's death. As children typically do not contribute financially to the household, life insurance for them may seem unnecessary. However, some families opt for it to secure their child's future insurability, especially if there is a family history of serious medical conditions or if the child has a disability. Child life insurance policies are usually whole life insurance policies, which means they offer lifelong coverage as long as premiums are paid and also accumulate cash value over time. While this can serve as a savings vehicle for the child's future, the returns are generally low compared to other investment options. The likelihood of a child's death is also very low, making the need for such insurance questionable. An alternative to child life insurance is to add a child rider to the parent's or guardian's life insurance policy, providing coverage for all children in the household at a low cost.

Peace of mind for parents

It's only natural for parents to worry about their children. Life insurance for children can help ease some of those worries by providing a financial safety net in the unfortunate event of a child's death. While the chances of a child dying are very low, life insurance can offer some peace of mind and help parents prepare for the unexpected. Here's how:

Guaranteed Insurability:

Life insurance for children can guarantee their insurability in the future. If a child develops a medical condition or health issues later in life, they may have difficulty obtaining life insurance as an adult. By purchasing a policy when they are young and healthy, parents can ensure their child will always have coverage. This is especially beneficial if there is a family history of serious medical conditions or if the child has a disability.

Lock in Lower Rates:

The cost of life insurance premiums is based on age and health. By purchasing life insurance for their child, parents can lock in lower rates for the long term. As the child grows older, they can keep the same policy with the same monthly payment, which may be significantly lower than what they would pay as an adult, especially if their health changes.

Build a Financial Base:

Whole life insurance policies for children can help build a financial nest egg over time. These policies accumulate "cash value," which is a sum of money set aside with each monthly premium payment. The longer the policy is held, the more cash value it accumulates. Once the child becomes an adult, they can borrow against this cash value or surrender the policy and receive the accumulated cash. This can be a good start for their financial future, helping with expenses like education or a down payment on a home.

Cover Funeral Costs and Other Expenses:

While no parent wants to think about the possibility of their child's death, life insurance can provide a payout to cover funeral costs and other final expenses. It can also help parents take time off work to grieve and care for their family during a difficult time.

Alternative Options:

Instead of a separate life insurance policy for their child, parents can add a "child rider" to their own term life insurance policy. This is a more affordable option, usually costing around $50 per year for a $10,000 child rider. It provides coverage for all children in the household and can be converted into a whole life policy when the child becomes an adult.

In conclusion, while life insurance for children may not be necessary for all families, it can offer peace of mind and financial protection for parents. It ensures that their child will always have insurance coverage, locks in lower rates, and can provide a financial base for the child's future. When considering life insurance for children, it's important to weigh the pros and cons and assess the family's budget and specific needs.

Pros and cons of child life insurance

Pros of Child Life Insurance

• Lower rates: The younger the child, the lower the premium. This means that by buying life insurance for your child early, you can lock into a lower price that they can maintain throughout their lifetime.
• Lifelong coverage: Buying a whole life insurance policy for a young child guarantees future insurability, even if they later develop a medical condition that would interfere with coverage options.
• 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 and other final expenses.
• Savings: Some types of life insurance policies for children can be used as a savings tool that the policy owner can access through a withdrawal or low-interest loan.
• Guaranteed insurability: When a person is insured from birth, it’s unnecessary to go through an underwriting process again as an adult.
• Investment benefits and tax savings: Some insurers guarantee that juvenile policies will continue to accumulate cash value regardless of what is happening in the financial markets.

Cons of Child Life Insurance

• Long-term commitment: Buying a whole life insurance policy for a young child means paying premiums for many years. If money gets tight and you miss a payment or cancel the policy, you will have paid all that money for nothing.
• Lower rate of return: It could be a decade or two before the policy accumulates enough cash value to equal the amount paid in premiums. You could make other investments with that same money, such as a tax-deferred college savings plan, that could yield a higher rate of return over the same amount of time.
• Financial trade-off: You could use the money you would spend on life insurance premiums for other child-related expenses.
• Unnecessary for most: The death of a child is rare, and very few children earn an income large enough to support a family. Unless a child has a family of their own, life insurance is not necessary.

When is it worth it?

Life insurance for children is a heavily marketed product, but it is generally unnecessary. The purpose of life insurance is to provide a financial safety net for your loved ones after your death, and most parents do not rely financially on their children. However, there are some situations in which purchasing life insurance for your child may be worth considering:

• Guaranteeing future insurability: If your child develops a medical condition or health issues later in life, they may struggle to qualify for adult life insurance. A pre-existing health condition or a dangerous hobby, such as scuba diving, can make it difficult and expensive to get insured. A children's life insurance policy guarantees that your child will have coverage as an adult, regardless of their health status. This is especially relevant if your family has a history of genetic medical conditions.
• Locking in lower rates: The younger you are, the lower your insurance rates will be. By purchasing life insurance for your child when they are young and healthy, you can lock in lower rates that will last into adulthood. This can be a good strategy if you think your child may struggle to get affordable insurance as an adult due to health issues.
• Building a financial base: Whole life insurance policies for children can help build a "cash value" over time. This money is set aside with each monthly premium payment and can be borrowed against or withdrawn in the future. This can provide your child with a financial cushion for significant expenses, such as buying a home or starting a family.
• Covering funeral costs and other expenses: While the chances of a child dying are very low, life insurance can provide financial protection in the event of a tragedy. The payout from a life insurance policy can help cover funeral costs, medical bills, and other final expenses. It can also allow grieving parents to take time off work without worrying about lost income.
• Your child has a substantial income: If your child is an actor, model, social media star, or entrepreneur who earns a substantial income that you rely on, then it may be worth considering life insurance for them. This is because the primary purpose of life insurance is to replace the income of the insured person in the event of their death.

In most cases, it is more important to have adequate life insurance for yourself as a parent, as this will provide financial support for your family if something happens to you. However, the above scenarios are situations in which purchasing life insurance for your child could be a worthwhile investment.

How does it work?

Life insurance for children is a standalone policy that insures a child's life. The insurer pays out a death benefit when the child passes away.

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 add a "children's term life insurance" rider. This rider pays out if the child passes away, but the rider's coverage ends if the parent dies first. You may be able to convert the rider to a permanent policy for the child once they reach a certain age.

Whole life insurance policies are the most common type of life insurance for children. 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 towards building cash value, which can be accessed while the child is alive, for any reason.

The process of buying life insurance for a child is relatively quick and easy. You'll have to fill out an application, but your child won't have to take a life insurance medical exam, which insurers often require for adults. Typically, you can buy life insurance for a child who is age 17 or younger. However, the cap can be lower—for example, the age limit is 14 for the Gerber Life Grow-Up Plan. The coverage remains in force throughout the child's life, as long as the premiums are paid.

As the owner of the child's policy, you can transfer it to your child at any point. It's common for parents to transfer policies to their kids once they're adults and let them take over premium payments. For example, with Gerber Life, the child becomes the policy owner at age 21.

To buy a life insurance policy for a child, you'll need to provide the child's full name, date of birth, and Social Security number. There may be a few health-related questions or none at all. Unless the child has a chronic medical condition or disease, there are typically no delays in getting approved.

Alternatives to child life insurance

Before opting for life insurance for your child, there are a few alternatives you can consider. Here are some options to explore:

• Rider on Your Own Policy: Instead of purchasing a separate policy for your child, you can add a child term rider to your existing life insurance policy. This rider will cover all your children and pay out a specified amount in the unfortunate event of your child's death. This is a more affordable option, costing around $50–$60 per year, and it covers all your children until they are no longer dependents.
• Emergency Fund: Instead of paying premiums for a child life insurance policy, consider putting that money into an emergency fund. By saving up three to six months' worth of living expenses, you can easily cover funeral costs or other unexpected expenses. This gives you more control over your money and ensures it is readily available when needed.
• Supplemental Life Insurance through Your Employer: Check with your employer to see if they offer supplemental life insurance as part of your benefits package. Some of these policies may include coverage for eligible dependents, such as your children, which could provide an additional layer of protection without the need for a separate child life insurance policy.
• Other Investment Options: If saving for your child's future is a priority, there are alternative investment vehicles available. These include traditional savings accounts, mutual funds, or 529 college savings plans. These options may offer higher returns and more flexibility than the cash value component of a life insurance policy. Consult with a financial planner to determine the best savings strategies for your family's goals.

Frequently asked questions