Understanding Life Insurance Coverage For Your Children

Life insurance for children is usually purchased by a parent or guardian as a safety net in the case of their child's death. These policies can be term-based, lasting until the child becomes an adult, or permanent, which would allow the child access to coverage for their entire life at a locked-in lower rate. The minimum age for life insurance ranges from 0-14 days, meaning you can take out life insurance for your baby, child, or teen. Typically, no medical exam is needed to qualify for coverage.

Child life insurance policies typically include or offer a guaranteed purchase option. This means the child can buy additional coverage without completing a life insurance medical exam. This feature can be useful if the child develops a chronic health condition or chooses a risky career.

Whole life insurance policies include a benefit called cash value – a small pool of money that grows over time. Cash value is money set aside by the insurance company when premium payments are made after the initial policy years.

In the US, most states allow children to stay on their parent's health insurance plans until the age of 26.

Pros and cons of life insurance for children

Pros:

• Guarantees future insurability: Child life insurance policies typically include or offer a guaranteed purchase option, meaning the child can buy additional coverage without a medical exam. This can be useful if the child develops a chronic health condition or chooses a risky career.
• Acts as a savings vehicle for your child: The cash value account of a whole life insurance policy grows tax-deferred, and the child can access the funds when they reach adulthood. This money can help cover costs like school fees or a down payment on a home.
• Covers final expenses: Child life insurance policies pay out a lump sum in the event of the child's death, which can be used for burial costs or grief counselling.
• Lower rates: Life insurance for children guarantees a lower rate than if the child were to wait and get their own policy as an adult.
• Lifelong coverage: Buying a whole life insurance policy for a child guarantees future insurability, even if they develop a medical condition later in life.
• Guaranteed insurability rider and additional riders: Depending on the policy, the child may be able to buy additional insurance for more financial protection when they are older, even if they develop health issues.

Cons:

• Long-term costs: Keeping a life insurance policy active for a child means paying decades' worth of premiums. If the policy becomes unaffordable and you have to cancel it, you will have paid all that money for nothing.
• Other investment options: There are other ways to provide financial support for a child once they reach adulthood, such as a 529 college savings plan.
• Low rate of return: Whole life insurance policies for children may take a decade or two to accumulate enough cash value to equal the amount paid in premiums. Other investments, such as a tax-deferred college savings plan, may yield a higher rate of return over the same period.
• Money could be used for other things: The money spent on life insurance premiums for a child could be used for other child-related expenses, such as education or extra-curricular activities.
• Healthy young adults might get similar coverage: Since healthy young adults in their early 20s are likely to secure competitive life insurance rates, it may be more cost-effective to wait to purchase insurance on their behalf.

Whole life insurance for children

Guaranteed Coverage and Locked-in Premiums

Accumulation of Cash Value

Whole life insurance policies for children accumulate cash value over time. This means that the policy can grow in value and provide the child with a financial resource when they reach adulthood. The cash value can be used for various purposes, such as a down payment on a home, college tuition, or starting a business.

Tax Advantages

The cash value that accumulates in a whole life insurance policy is typically tax-deferred, meaning there are no immediate tax consequences. Additionally, in most cases, there are no tax implications when accessing the cash value. Furthermore, the death benefit received by beneficiaries is generally not taxable.

Peace of Mind and Future Insurability

Pros and Cons

Some advantages of whole life insurance for children include guaranteed future insurability, access to cash value, and assistance with final expenses in the event of a child's death. However, there are also potential drawbacks, such as poor rates of return and long-term expenses. The low mortality rates associated with children can result in a poor rate of return on whole life insurance plans. Additionally, whole life insurance policies often come with lifelong premium payments, which can be a significant financial commitment.

Cost Considerations

The cost of whole life insurance for children will depend on various factors, including age, health, and coverage amount. Getting insurance coverage at a young age allows you to lock in lower premiums that will remain fixed for the duration of the policy.

In summary, whole life insurance for children can provide lifelong protection and peace of mind for parents and guardians. It ensures that their children will always have insurance coverage, regardless of future health or occupational risks, and it can also serve as a valuable financial resource due to its accumulation of cash value. However, it is important to carefully consider the potential drawbacks, long-term expenses, and cost implications before deciding whether this type of insurance is the right choice for your family.

Term life insurance for children

With term life insurance, the child is the insured and the parent or guardian is the beneficiary. This means that if the unthinkable happens and the child passes away while still a minor, the parent or guardian will receive the policy's death benefit. This can be used to cover funeral expenses or to allow the parent or guardian to take time off work to grieve.

One of the main advantages of term life insurance for children is that it guarantees future insurability. It also allows the child to access the cash value of the policy later on, which can be useful for college tuition or a down payment on a first home. Additionally, the premiums for term life insurance are typically lower than those for permanent life insurance, making it a more affordable option for parents or guardians.

However, there are also some disadvantages to consider. Term life insurance for children may result in long-term expenses, as the policyholder will need to pay premiums for decades to keep the policy active. There are also alternative investment options available, such as a 529 college savings plan, which may offer higher returns.

Child rider vs life insurance for children

When it comes to safeguarding your child's future, life insurance is a crucial aspect to consider. Two prominent options available are purchasing a separate life insurance policy for your child or adding them to your existing policy as a child rider. Here is a detailed comparison between the two:

Child Rider

A child rider is an add-on to your existing life insurance policy that extends coverage to your children. It is a cost-effective way to ensure your children without purchasing a separate policy for each child. The rider covers all unmarried, dependent children, including those born after the rider is added, under a single flat fee. The coverage limit typically ranges from $1,000 to $100,000, depending on the insurer. The rider remains active until the child reaches adulthood, usually between 18 and 25 years old. One notable advantage of a child rider is that it guarantees future insurability for your child, even if they develop health issues. Additionally, it can be converted into a permanent policy when the child matures, without the need for a medical exam or considering their health condition. This conversion option ensures that your child will have coverage as they become an adult, although they will be responsible for paying the premiums.

Life Insurance for Children

On the other hand, purchasing a separate life insurance policy for your child can provide more comprehensive and permanent coverage. These policies are typically whole life insurance products, which means the coverage lasts for the child's entire life as long as the premiums are paid. The coverage amounts are often lower, usually under $50,000, and the premiums are locked in at a lower rate due to the child's young age. One significant advantage of this option is the accumulation of cash value over time. The policy builds a cash reserve, allowing your child to access these funds when they reach adulthood. Additionally, in the unfortunate event of your child's death, the policy pays out a lump sum to the beneficiary, which can help cover funeral expenses and other costs.

Key Differences

The main distinction between the two options lies in their scope and cost. A child rider is more affordable and provides basic coverage for your children until they reach adulthood. In contrast, a separate life insurance policy for your child is more expensive but offers permanent coverage and accumulates cash value over time.

When deciding between the two, consider your budget, the level of coverage desired, and whether you prioritize locking in permanent coverage for your child from a young age. Consult with a financial advisor to assess your specific needs and make an informed decision that aligns with your family's goals.

When to get life insurance for your child

Life insurance for children is usually purchased by a parent or guardian as a safety net in the case of their child's death. It can also provide coverage and financial support later in life.

The minimum age for life insurance ranges from 0 to 14 days, meaning you can take out life insurance for your baby, child, or teen. Typically, no medical exam is needed to qualify for coverage, so you can enrol them whenever the timing is best. However, enrolling them at a younger age may result in a lower premium.

There are two main types of life insurance for children: term-based and permanent. Term-based insurance lasts until the child becomes an adult, while permanent insurance allows the child to access coverage for their entire life at a locked-in lower rate.

Pros

• Ensuring lifelong coverage: Purchasing a convertible term or whole life policy for a young child ensures they'll have coverage later in life, especially if they develop a medical condition that may make buying their own policy difficult.
• More cash value: Buying a whole life policy for a child allows more time for the cash value account to grow, providing them with an additional financial resource once they reach adulthood.
• Cheaper premiums: Since children cost less to insure, you can get a lower premium on a whole life policy than if your child were to wait to get their own policy as an adult.
• Covers final expenses: If your child were to die, a policy could cover the funeral, medical bills, and other expenses.
• Ensures coverage later: A life insurance policy for a child can guarantee coverage when they're older, even if they develop disabilities, have health issues, or take up a risky occupation.
• Builds a nest egg: Since whole life policies can accumulate cash value, a child's life insurance can start them off with financial security.

Cons

• Long-term costs: Keeping a life insurance policy active for your child means paying decades' worth of premiums. If the policy becomes unaffordable, you may have to cancel it before your child can take over the premium payments.
• Other investment options: There are other ways to provide financial support for a child once they reach adulthood, such as a 529 college savings plan.
• Policies don't build cash value quickly: This makes them less effective investments for paying for college or other goals.
• Not all providers offer life insurance for children.
• Many policies max out at $50,000 or $75,000 in coverage.

In summary, getting life insurance for your child can provide a financial safety net for your family and ensure that your child has coverage and financial support later in life. However, there are also long-term costs and alternative investment options to consider. It's important to weigh the pros and cons before making a decision.

Frequently asked questions