Leaving A Universal Life Insurance Legacy For Your Children

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: buying a separate life insurance policy specifically for the child, or adding a children's term life insurance rider to a parent's policy. This rider pays out if the child passes away, but the coverage ends if the parent dies first. The rider can often be converted to a permanent policy for the child once they reach a certain age.

Whole life insurance for children: pros and cons

Whole 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.

Pros

• 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 — that they will have life insurance coverage for their entire lives, even if they later develop a medical condition that would interfere with coverage options.
• Guaranteed insurability rider and additional riders: Depending on the policy, your child might be able to buy additional insurance for even more financial protection when they are older, even if they develop health issues.
• Final expenses: A life insurance policy can help grieving parents and family members by relieving them of funeral costs and letting them focus on grieving and healing.

Cons

• Long-term commitment: When you buy a whole life insurance policy for a young child, you can expect to pay premiums for many years. If money gets tight and you miss a payment or cancel the policy, you may feel that you have wasted your money.
• Lower rate of return: It could be a decade or two before the policy accumulates enough cash value to equal the amount you’ve paid in premiums. You could make other investments with that same money that could yield a higher rate of return over the same amount of time.
• Opportunity cost: Raising children is expensive. If you commit to paying life insurance premiums for an extended period, that could mean you have less money to spend on other things your child needs as they grow up.
• Low coverage amounts: Coverage amounts for children's life insurance policies tend to be low, often under $50,000, and may not meet your child's needs later in life.
• Low rate of return: Although whole life insurance policies build cash value, they do so at a low rate of return. So life insurance for a child shouldn’t be a substitute for a 529 college savings plan or other types of investments with higher interest rates.

How to buy life insurance for children

Children's 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.

There are two ways to buy life insurance for a child:

• Buy a separate life insurance policy specifically for 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.

Children's life insurance typically provides coverage for a minor until they reach adulthood, but the coverage can continue as long as premiums are paid. Death benefits are usually $50,000 or less, but some insurers can provide coverage up to $500,000. Policies may include a guaranteed insurability rider, which allows additional coverage to be purchased once the child reaches a certain age or passes a specific life milestone.

Most insurers will automatically transfer ownership of a whole life policy from a parent, grandparent, or guardian to the insured child once they become an adult. With a child life rider or add-on to a qualified adult policy, ownership is usually transferred later, at age 23 or 25, depending on the insurer.

Pros and cons of buying life insurance for children

Pros:

• Provides a death benefit that can pay for a funeral or other expenses after the death of a child.
• Securing life insurance during childhood can make maintaining coverage easier and more affordable when children reach adulthood, especially if they have a family history of medical issues or end up in a risky profession as adults.
• The cash value of a children's life insurance policy grows tax-deferred, so you won't pay taxes on gains until you withdraw them.

Cons:

• Children are less likely to die young, so your money may be better spent elsewhere.
• Coverage is typically low and may not meet your child's needs later in life.
• Cash benefits are often touted as a savings vehicle, but other investment types typically have higher interest rates.

Who should consider buying children's life insurance?

• Those who want to guarantee their child's future insurability, especially if there is a family history of medical conditions.
• Those who want to lock in lower premiums, as the younger the insured person is, the cheaper their premiums will be.
• Those who are saving for the future, as whole life insurance policies contain a savings component that grows over time.

Who shouldn't consider buying children's life insurance?

• Those who have alternative ways to save for their child's future, such as bank savings accounts, mutual funds, or 529 college savings plans.
• Those who cannot afford the premium.

How to buy children's life insurance

Children typically become eligible for coverage at 14 or 15 days old. Parents, grandparents, and legal guardians can buy life insurance for their children by contacting insurers directly, either online or by phone, or through a licensed agent. Employers that provide group life insurance to their workers may also offer optional supplemental life insurance, including policy riders to cover children. Not all insurance companies offer child life insurance policies and riders, so check with your insurer or agent.

Pros and cons of buying life insurance for children

Pros of Buying Life Insurance for Children:

• Guaranteed Insurability: Buying life insurance for your child guarantees that they will have coverage even if they develop a health condition later in life. This is especially beneficial if your family has a history of genetic medical conditions.
• Low Rates: You will never get a lower rate on life insurance than when a child is a newborn. Rates for new policies will increase as the child gets older.
• Funds for Funeral Expenses: Although the chances of a child dying are very low, a life insurance policy can provide funds to cover final expenses and allow the family to take time off work to grieve.
• Cash Value: Whole life insurance policies have a cash value component that grows tax-deferred over time. This can be accessed by the child for any reason, such as college tuition or a down payment on a home.
• Long-term Coverage: Whole life insurance policies provide lifelong coverage as long as premiums are paid, ensuring that your child will always have insurance protection.
• Additional Coverage: Some policies offer the option to purchase additional coverage when the child becomes an adult, even if they develop health issues.

Cons of Buying Life Insurance for Children:

• Long-term Commitment: Buying a whole life insurance policy for a child is a long-term commitment, and you should expect to pay premiums for decades. If you cancel the policy or miss payments, you will lose the money invested.
• Low Rate of Return: Whole life insurance policies have a low rate of return compared to other investment options, such as a 529 college savings plan. It may take 15 years or more for the cash value to equal the premiums paid.
• Limited Funds for Other Expenses: Buying life insurance for a child is an additional cost, and you may need to sacrifice spending money on other things your child needs as they grow up.
• Low Coverage Amounts: Coverage amounts for children's life insurance policies tend to be low, typically $50,000 or less. This may not be sufficient for an adult with a family to support.

How to leave life insurance to children

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:

• Buy a separate life insurance policy specifically for 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.

If you decide to purchase life insurance for the benefit of your children, you need to arrange a legal means for the proceeds to be managed and supervised by a competent adult. If you don't, and your children are not legal adults when you die, the court will appoint a property guardian for them. This process involves attorneys' fees, court proceedings, and court supervision of life insurance benefits—costs and hassles that won't help your children. Here are some ways to prevent this:

• Name a trusted adult beneficiary: You might not want to name minors as beneficiaries of your life insurance policy. Instead, name a trusted adult beneficiary who will use the money for the children's benefit. If you are confident that this adult will not waver from their duty, even years down the line, this might be the easiest option.
• Name your children as beneficiaries and appoint an adult custodian: You can name your children as your life insurance policy beneficiaries and also name an adult custodian under your state's Uniform Transfers to Minors Act (UTMA). Most insurance companies permit this and have forms for it. If you want the proceeds to go to more than one child, you'll need to specify the percentage each receives.
• Set up a living trust: If you have a living trust, you can name the trustee as the beneficiary of the life insurance policy. In the trust document, name the minor children as beneficiaries of any money the trust receives from the insurance policy. Also, establish within the trust a method to impose adult management over the proceeds, which can be either a UTMA custodianship or a child's trust. You'll need to give a copy of your living trust to the insurance company.

Pros and cons of buying life insurance for children:

Pros:

• Guaranteeing insurability: The biggest selling point of life insurance for a child is that you're guaranteeing that your child will have coverage even if they develop a health condition later in life.
• Locking in low rates: You'll never get a lower rate on life insurance than when a child is a newborn. Rates for buying a new policy will increase as the child gets older.
• Providing funds for funeral expenses: The chances of a child dying are very low, so funeral costs are not a good reason to buy life insurance for a child. But if that happens, a life insurance policy will provide funds that can cover final expenses.
• Cash value: A portion of the premiums paid for a whole life insurance policy goes toward building cash value. When you buy a policy for a child vs. an adult, a bigger portion of the premium will go toward the cash value because the cost of insurance is low, and there's more time for the cash value to build.

Cons:

• Low rate of return: Whole life insurance policies build cash value, but they do so at a low rate of return. So life insurance for a child shouldn't be a substitute for a 529 college savings plan, for example.
• Long-term commitment: When you buy a whole life insurance policy, you should expect to pay premiums for decades. If cash flow becomes tight, it might not be worth it.
• Low coverage amounts: Some insurers limit the coverage amount for children's life insurance policies, and this might not be enough coverage once your child is an adult.
• Financial trade-off: If you buy life insurance for a child, you're giving up money that could be used on other things to support the child's well-being. Because it is statistically very unlikely that your child will die at a young age, your money might be better spent elsewhere.

Life insurance beneficiaries: what you need to know

A life insurance beneficiary is the person or entity the policyholder names to receive the death benefit. There are two main types of life insurance beneficiaries: primary and contingent. A primary beneficiary is the person or entity who is first in line to receive the death benefit payout after your passing. A contingent beneficiary is a backup beneficiary who will receive the death benefit payout if the primary beneficiary passes away or can’t be found.

Choosing a Beneficiary

Choosing the right life insurance beneficiary is essential. Policyholders may purchase life insurance to help their spouse cover mortgage payments, pay everyday bills, or fund their children's college education. There is no specific rule around naming your spouse as the life insurance beneficiary. However, it’s important to understand that a life insurance policy is a legally binding contract, so choose wisely.

Changing a Beneficiary

The life insurance plan is a contract between the policyholder and the insurance company. This means that only the policyholder can change the beneficiary on the life insurance policy. It can be a good idea to name a secondary beneficiary in case plans change. It is important to spell their full names correctly when designating a beneficiary. Children under the age of 18 are not able to receive the death benefit directly, so this must be factored into your plan.

Not Naming a Beneficiary

If you don’t designate beneficiaries, it will be more difficult for your loved ones to receive the death benefit payout after your passing. The payout will either be paid to your estate or held in probate, which may take years for your loved ones to access.

Payout Options

There are a few different options for how your life insurance policy beneficiary will be paid out:

• A lump sum payment allows the death benefit to be paid out in one large sum, rather than in timed installments.
• The death benefit can be paid to the life insurance policy beneficiary in scheduled installments, mimicking a typical stream of income.
• A retained asset account allows the beneficiary to write checks against the balance of the death benefit, with the insurance company acting like a bank. The beneficiary may still be able to collect interest on the death benefit.

Frequently asked questions