Life Insurance: A Child Changes Everything

Life insurance for children is a topic that not many people consider, but it can be a good idea for some families. The primary purpose of life insurance is to provide financial protection for loved ones in the event of the policyholder's death. Since most parents are not financially dependent on their children, life insurance for children is generally unnecessary. However, there are some situations in which purchasing life insurance for your child may be beneficial.

One reason to consider life insurance for your child is to guarantee their future insurability. If your child develops a medical condition later in life or chooses a high-risk career, they may have difficulty obtaining affordable life insurance as an adult. Purchasing a policy for your child while they are still young can help alleviate this concern.

Another advantage of life insurance for children is the potential for cash value accumulation. Some life insurance policies for children, particularly whole life insurance policies, include a cash value component that grows over time. This money can be accessed by the child later in life for various purposes, such as buying a home or paying for education.

It's important to weigh the pros and cons before deciding whether to purchase life insurance for your child. While it can provide peace of mind and financial benefits, it is also a long-term financial commitment that may not be necessary if your child is healthy and has no known risk factors.

Should you get life insurance for your child?

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 that grows over time.

There are two ways to buy life insurance for a child: as a standalone whole life policy written for the child or as an add-on (called a rider) to a parent's or guardian's term or permanent life insurance policy.

Pros of buying life insurance for your child

• It can help secure your child's future financial security.
• If you purchase an insurance policy with a cash value, your child will have more time for it to accumulate.
• The younger your child is when you buy a policy, the cheaper it will be.
• It guarantees your child's insurability even if they develop health issues later in life.
• It can provide funds for funeral expenses.
• It can be used as a savings vehicle for your child.

Cons of buying life insurance for your child

• It is a long-term commitment.
• Coverage amounts tend to be low and may not meet your child's needs as an adult.
• It is a financial trade-off as the money could be used for other things to support the child's well-being.
• It offers a low rate of return compared to other investment types.

Pros and cons of child life insurance

Pros of Child Life Insurance

Child life insurance policies can be beneficial in several ways. Firstly, they guarantee future insurability, meaning that the child will have coverage even if they develop a health condition or choose a risky career later in life, which could make it difficult to obtain insurance as an adult. Secondly, these policies can act as a savings vehicle for the child, allowing them to withdraw or borrow against the cash value of the policy when they reach adulthood. Additionally, child life insurance provides financial protection in the unfortunate event of the child's death, covering costs such as burial expenses and grief counselling. Securing life insurance for a child can also be advantageous if there is a family history of medical conditions that may impact their ability to obtain affordable insurance in the future. Furthermore, child life insurance policies offer low premium rates that are locked in for the duration of the policy, making it a relatively affordable option.

Cons of Child Life Insurance

One of the main drawbacks of child life insurance is the long-term financial commitment it entails. Paying premiums over many years can be a significant expense, and there is a risk of losing money if the policy is cancelled or payments are missed. Additionally, the rate of return on these policies is typically lower compared to other investment options, such as a college savings plan. While the cash value of the policy grows over time, it may take a decade or more to accumulate enough value to equal the amount paid in premiums. Furthermore, critics argue that the likelihood of a child's death is relatively low, and the money spent on insurance premiums could be better utilised elsewhere, such as on other financial priorities or supporting the child's well-being. Finally, the coverage amounts for child life insurance policies tend to be low and may not meet the child's future insurance needs as an adult.

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.

On the other hand, a child rider is an add-on to a parent or guardian's life insurance policy that provides a small amount of life insurance coverage for their children. It is typically more affordable than a standalone child life insurance policy and can be converted into a permanent policy when the child reaches adulthood.

Child Life Insurance

Child life insurance policies are typically whole life insurance policies, which means they provide coverage for the child's entire life as long as the premiums are paid. The coverage amounts tend to be low, often under $50,000, and the premiums are locked in, meaning they won't increase over time. One of the benefits of whole life insurance is that it builds cash value, which can be accessed by the child for any reason while they are alive.

Child Riders

Child riders are a more affordable option compared to standalone child life insurance policies. They are added to the parent or guardian's life insurance policy and cover all eligible children, including future children. The coverage is temporary and usually lasts until the child reaches adulthood, at which point it can be converted into a permanent policy. The death benefit provided by the child rider can help cover expenses such as funeral costs, time off work, and counseling in the event of the child's death.

Key Differences

The main difference between child life insurance and child riders is that child life insurance is a standalone policy, while child riders are added to an existing policy. Child life insurance policies tend to have higher coverage amounts and premiums compared to child riders. Child riders offer a more affordable option for parents or guardians who want to ensure their children have some form of life insurance coverage.

Another difference is that child life insurance policies are typically whole life insurance, while child riders can be added to either term or whole life insurance policies. Whole life insurance provides lifelong coverage, while term life insurance only provides coverage for a fixed period.

Both child life insurance and child riders have their advantages and disadvantages. Child life insurance guarantees coverage for the child's entire life, but it may be more expensive. Child riders offer a more affordable option, but the coverage is temporary and may not be sufficient for everyone's needs. The best option depends on the family's financial situation, needs, and priorities.

Alternatives to child life insurance

Before opting for child life insurance, it is recommended that you ensure you have sufficient coverage for yourself. It is also advised that you tackle other financial priorities, such as building an emergency fund, saving for retirement, and paying off high-interest debt.

• Mortgage insurance: This type of insurance can help keep your mortgage from defaulting due to unemployment, accident, illness, or death. It combines mortgage life insurance with critical illness cover and mortgage payment protection insurance, providing a financial safety net for your family.
• Income protection insurance: This type of insurance provides financial benefits if you are unable to work due to redundancy or other unforeseen circumstances. It can help cover your financial needs and protect your income in the event of an unexpected situation.
• Critical illness policy: This type of insurance provides benefits if you are diagnosed with a serious illness meeting certain criteria. It can help cover medical expenses and provide financial support during a difficult time.
• Supplemental life insurance through your employer: Some employers offer supplemental life insurance as a benefit, which can include coverage for spouses or children. This option may be worth considering if you already have group life insurance through your work.
• Investments and savings: Instead of purchasing life insurance, you may choose to invest in other financial products with higher interest rates, such as mutual funds or 529 college savings plans. This can provide a higher return on your money and give you more flexibility in how you use the funds.

When is the best time to get life insurance for your child?

The best time to get life insurance for your child is when they are young, ideally within the first two weeks of their life. The younger the child, the lower the premium will be, and the rate can be locked in for the duration of the policy. This means that the child will have coverage for their entire life, as long as the premiums are paid.

Whole life insurance policies for children are typically purchased by parents or grandparents and are relatively quick and easy to obtain. They can provide lifelong coverage, and the policy can be transferred to the child when they reach adulthood. The policy can also be used as a savings vehicle, as it builds cash value over time.

However, it is important to note that life insurance for children is not always necessary. Children usually do not have dependents or financial obligations, so there may be other financial priorities to consider first. Additionally, the coverage amounts for children's life insurance policies tend to be low, and the rate of return on the cash value component may be lower than other investment options.

Therefore, the best time to get life insurance for your child is when they are young, but it is important to weigh the benefits against other financial priorities to determine if it is the right decision for your family.

Frequently asked questions