Life Insurance For Children: Placement And Parental Peace

Life insurance for children is a complex topic and it can be challenging to determine the best approach for your family. While it may seem unnecessary, there are several benefits and drawbacks to consider. Here's an introduction to help you navigate this important decision.

Life insurance for children is typically purchased by parents or guardians, offering a safety net in the tragic event of a child's passing. These policies can be term-based, covering the child until they reach adulthood, or permanent, providing lifelong coverage at a locked-in lower rate. The primary objective is to alleviate the financial burden of funeral expenses and other immediate costs associated with the loss of a child. However, some policies also offer a long-term savings component, allowing the cash value to grow over time and providing a financial cushion for the child's future needs, such as education or a down payment on a home.

When considering life insurance for your children, it's essential to weigh the pros and cons. On the one hand, it can provide guaranteed insurability, locked-in rates for life, and a tax-deferred vehicle for additional savings. On the other hand, there may be better investment alternatives with higher rates of return, and it requires a lifelong commitment to maintain coverage. Additionally, child life insurance policies usually offer lower coverage amounts compared to adult policies.

Before making a decision, it's recommended to consult a financial advisor to explore all options, including alternative investment vehicles such as 529 college savings plans, custodial accounts, and retirement accounts. Ultimately, the choice depends on your family's specific needs, financial situation, and long-term goals.

Whole life insurance policies for children

• Lock in low childhood rates: Whole life insurance is expensive, but younger policyholders tend to pay lower premiums. Whole life insurance for children allows you to lock in cost-effective premiums for your child, which can help you save on premiums while your child is still a minor. Once they take possession of the policy (usually when they reach the age of majority as defined by state law), they may be able to fit the premiums more easily into their budget.
• Guarantee coverage throughout adulthood: Whole life insurance for children guarantees coverage for the child's entire life, regardless of future health or occupation. This can be especially useful if the child develops a chronic health condition or chooses a risky career, as people with health problems or hazardous jobs typically pay much more for life insurance.
• Potential cash value: Whole life insurance for children can provide a cash value that grows with your child. This cash value can be used for various purposes, such as a down payment on a home, paying for college, funding a business opportunity, or providing a comfortable retirement.
• Lower premium rates: Life insurance premiums generally increase with age. With whole life insurance for children, you can lock in lower premiums at the child's current age, resulting in unusually low premiums for their entire life.
• Guarantee future insurability: Whole life insurance policies for children typically include or offer a guaranteed purchase option. This means the child can buy additional coverage without completing a life insurance medical exam, even if their health status changes or they choose a high-risk occupation.
• Acts as a savings vehicle: You can withdraw money from or borrow against the cash value account. When the child reaches adulthood, they can surrender the policy and receive the funds in full. This can be useful for covering costs such as school fees or a down payment on a home.
• Covers costs in the event of the child's death: Losing a child is extremely painful, and you may incur unexpected costs. Whole life insurance policies for children pay out a lump sum in the event of the child's death, as long as the premiums are paid. The payout can be used for expenses such as burial costs or grief counselling.

However, there are also some potential drawbacks to consider:

• Long-term costs: Maintaining a whole life insurance policy for your child means paying premiums for decades. 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 alternative ways to provide financial support for your child once they reach adulthood, such as a 529 college savings plan. It's essential to consult a financial advisor to compare all your options before choosing a plan or policy.

Pros and cons of child life insurance

Child life insurance is a type of permanent life insurance that insures the life of a minor. It is typically purchased by parents or grandparents to provide a death benefit that can help cover funeral expenses and other costs in the event of a child's untimely death. While it can be a valuable safety net for families, there are several pros and cons to consider before purchasing child life insurance.

Pros of Child Life Insurance:

• Lower rates: Life insurance rates are typically lower for children due to their younger age and longer life expectancy. This allows parents to lock in a lower fixed-rate premium that the child can maintain throughout their lifetime.
• Lifelong coverage: Whole life insurance policies provide coverage for the child's entire life, even if they develop a medical condition later on. This guarantees future insurability and ensures that the child will always have a safety net.
• Guaranteed insurability: Child life insurance policies often include a guaranteed purchase option, allowing the child to buy additional coverage without a medical exam. This can be useful if the child develops a chronic health condition or chooses a risky career.
• Financial protection: In the unfortunate event of a child's passing, life insurance provides a financial benefit to help cover funeral and medical expenses, as well as reduce financial stress on the family.
• Savings for education: Some child life insurance policies have a cash value component that grows over time, providing an additional financial resource for the child's education or other expenses when they reach adulthood.
• Easy approval: Children are typically easier to insure than adults and often don't require a medical exam for approval.

Cons of Child Life Insurance:

• Long-term commitment: Purchasing a whole life insurance policy for a child requires a long-term commitment to paying premiums. If the policy becomes unaffordable, it may need to be cancelled, resulting in a loss of money.
• Lower rate of return: It can take a significant amount of time for the policy to accumulate enough cash value to equal the amount paid in premiums. Other investment options may yield a higher rate of return over the same period.
• Opportunity cost: The money spent on life insurance premiums could be used for other child-related expenses or investments, such as a college savings plan.
• Limited death benefit: The death benefit for children's life insurance policies is typically lower than that of adult policies since children usually do not have income or financially support their families.
• May not be necessary: The likelihood of a child's death is relatively uncommon, and healthy young adults can often find similar coverage at competitive rates when they reach adulthood.

Child life insurance vs child riders

Child life insurance is typically purchased by a parent or guardian as a safety net in case their child passes away. These policies can be term-based, lasting until the child becomes an adult, or permanent, which allows the child to access coverage for their entire life at a locked-in lower rate. The policyholder is generally the purchasing adult, the beneficiary is usually a parent or guardian, and the insured is the child.

Child life insurance policies tend to be whole life products, which means coverage lasts for the child's entire life as long as the premiums are paid. Coverage amounts are often low, under $50,000, and premiums are locked in, meaning they won't increase. Whole life insurance also builds cash value over time, which can be used for things like a down payment on a home or paying for college.

On the other hand, a child rider is an additional provision that can be added to an existing life insurance policy to provide coverage for the policyholder's children. It is an affordable add-on that covers all biological and legally adopted children, including future children. The coverage amount is typically lower than the primary policy but is usually enough to cover expenses like medical bills or funeral costs in the event of a child's death.

Child riders offer a cost-effective way to provide life insurance coverage for children, with a single rider covering all eligible children. They also provide guaranteed insurability, ensuring that children have some form of life insurance coverage even if they develop health issues later in life. Additionally, child riders can be converted into standalone permanent life insurance policies for the child when they reach adulthood.

Both child life insurance and child riders have their advantages and disadvantages. Child life insurance provides lifelong coverage, accumulates cash value, and covers funeral services. However, it may result in long-term costs and there may be other investment options to consider. Child riders, on the other hand, are more affordable and offer guaranteed insurability, but they have limited coverage amounts and durations. Ultimately, the decision between child life insurance and child riders depends on the family's unique circumstances and financial goals.

When to buy life insurance for children

Financial Safety Net

If you are dependent on your child's income, it is worth considering getting life insurance for them. This is especially relevant if your child is an actor, model, or social media star bringing in a substantial income, or if they contribute to household expenses as a working teenager. In these cases, a life insurance policy can provide a financial safety net and help cover costs if something happens to your child.

Family Medical History

If your family has a history of genetic medical conditions, it might be a good idea to insure your child. Doing so guarantees that they will have coverage later in life if they develop a health condition that makes buying their own policy difficult or expensive. This can provide peace of mind and ensure your child's future insurability.

Funeral Expenses and Grief Counseling

While rare, if the unthinkable does happen and your child passes away, a life insurance policy can help cover funeral expenses and grief counseling. This can be a valuable source of support during an extremely difficult time.

Long-term Financial Planning

Life insurance for children can also serve as a long-term financial planning tool. Whole life insurance policies accumulate cash value over time, providing your child with an additional financial resource when they reach adulthood. This can be used for a down payment on a home, paying for college, or funding a business venture.

Age and Cost Considerations

The cost of life insurance for children varies depending on their age, health, and the type of policy. The younger the child, the lower the premium, as life insurance rates generally increase with age. Enrolling your child at a younger age can result in significant savings over time.

However, it is important to weigh the long-term costs of keeping the policy active. Life insurance for children can be a financial trade-off, as the money spent on premiums could be used for other investments or support for the child's well-being. Consult a financial advisor to compare your options and ensure you are meeting your own financial priorities first.

Alternatives to life insurance for children

If you don't want to buy a separate life insurance policy for your child, you can consider the following alternatives:

• Child term rider: You can add a child term rider to your existing life insurance policy. This rider can cover multiple children and pay out a small amount if a child dies. This option must be selected when purchasing your policy, but any children born or adopted after the policy is in place will typically be covered.
• Supplemental life insurance from your employer: Some employers offer supplemental life insurance plans that cover eligible dependents, including children. Check with your benefits coordinator to see if this coverage is available to you.
• Income protection insurance: This type of insurance pays a regular tax-free income if you are unable to work due to illness or injury. It does not pay out on death, but it can provide a financial safety net for your family if you are unable to work.
• Critical illness cover: This provides a tax-free lump-sum payment if you become critically ill. It is similar to income protection insurance, but it does not provide ongoing income.
• Mortgage protection insurance: This is a form of life insurance that is specifically designed to pay off your mortgage in the event of your death. The payout is restricted to paying off the mortgage, and there will be no additional funds available for other expenses.
• Accidental death insurance: This type of insurance covers you in the event of a fatal accident. It only pays out for unexpected events and does not cover death resulting from a terminal illness. It is generally cheaper than general life insurance.
• Savings account: Instead of paying premiums to an insurance company, you can set aside money in a savings account to provide financial support for your family if needed. This option gives you more flexibility to stop contributions or withdraw funds as needed. However, it may take time to accumulate a substantial savings pot.
• Pension: Your loved ones can inherit your pension in a tax-efficient way. If you have accumulated substantial pension savings, this could provide financial support for your family in the event of your death.
• Investments: Investing your money may provide a higher rate of return than a savings account, making it another way to provide financial support for your family. However, there is a risk of losing money when investing.

Frequently asked questions