Life Insurance For Children: Is It Necessary?

Life insurance for children is a polarising topic. While some believe it is unnecessary, others argue that it has its advantages. The primary purpose of life insurance is to provide financial support to loved ones in the event of the policyholder's death. Since children typically do not have dependents or earn an income, purchasing life insurance for them might seem counterintuitive. However, there are several reasons why buying life insurance for a child could be beneficial.

Pros: Lower rates, lifelong coverage, and guaranteed insurability

There are several benefits to buying life insurance for your child. Here are some pros to consider:

Lower rates

The younger the child, the lower the premium. When you buy insurance for a young child, the rate will be substantially lower than for an older child or young adult. You can lock in a lower price that the policyholder (your child) can maintain throughout their lifetime.

Lifelong coverage

Whole life insurance policies provide lifelong coverage as long as premiums are paid. 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

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 such as diabetes, or chooses a risky career like becoming a firefighter.

Cons: Long-term commitment, lower rate of return, and opportunity cost

Long-term commitment

Child life insurance policies are a long-term commitment, requiring premium payments for many years. This may be a significant financial burden, especially if money becomes tight, and failure to keep up with payments could result in the policy being cancelled and the previous payments lost.

Lower rate of return

Whole life insurance policies for children build cash value over time, but at a low rate of return compared to other investment options. It could take a decade or two for the policy's cash value to equal the amount paid in premiums. Other investments, such as a 529 college savings plan, could yield significantly higher returns over the same period.

Opportunity cost

The money spent on premiums for a child's life insurance policy could be invested in other ways to support the child's future. For example, it could be put into a savings account, such as an IRA or 529 plan, which often offer higher interest rates. This opportunity cost should be carefully considered before committing to a child life insurance policy.

Child riders: A cheaper and simpler alternative to child life insurance

Child riders are an add-on to a parent's life insurance policy that pays out a death benefit if their child passes away. This is a cost-effective way to insure the life of a child without buying a separate life insurance policy. Child riders are convertible, meaning they can be transformed into a permanent life insurance policy for the child.

To qualify for a child rider, the child must be between 15 days and 18 years old. The coverage will last until their 25th birthday or the parent's 65th birthday, whichever comes first. When the policy is about to expire, the child can convert the rider into a standalone policy without needing a medical exam or re-approval. The death benefit is a tax-free lump sum payment that can be used for any purpose, such as funeral expenses or income loss from an extended leave of absence from work.

Benefits of a child rider

A child rider is an affordable way to invest in a family's well-being. One flat-fee rider covers multiple children, including future children, adopted children, and stepchildren. It protects children regardless of their health status, even if they develop a life-threatening condition later in life. The rider can be converted to a permanent policy without a medical exam, and coverage remains active even if the child gets married.

Drawbacks of a child rider

While child riders offer many benefits, there are some limitations to consider. Coverage is typically limited to $25,000 or less per child, which may not be sufficient to cover outstanding medical bills or replace income. Additionally, the rider will terminate if the parent's policy terminates or if the parent reaches a certain age, such as 65. The amount that can be converted into a permanent policy may also be limited.

Child riders offer a cheaper and simpler alternative to child life insurance, providing coverage for final expenses and peace of mind for parents. However, it's important to consider the limitations of child riders and weigh them against the benefits to determine if this is the right choice for your family.

Whole life insurance: A permanent policy with a cash value account

Whole life insurance is a type of permanent life insurance policy that provides a fixed death benefit to the beneficiary if the insured child dies while covered. It is typically purchased by a parent, guardian, or grandparent. Whole life insurance policies tend to be more expensive than term life insurance policies, as they include a cash value component on top of the death benefit. This cash value component is a savings account that grows over time and can be accessed by the policyholder for a variety of purposes.

• Lifelong coverage: Whole life insurance provides coverage for the entire life of the insured child, as long as the premiums are paid regularly. This means that the beneficiary will receive a death benefit payout regardless of when the insured child passes away.
• Cash value growth: The cash value component of whole life insurance grows over time, providing a savings vehicle for the policyholder. This growth is tax-deferred, meaning taxes on the gains are not paid until the money is withdrawn. The cash value can be used to pay policy premiums, borrow against, or withdraw, providing flexible access to funds.
• Guaranteed insurability: Whole life insurance policies typically include a guaranteed purchase option, allowing the child to buy additional coverage without a medical exam. This can be useful if the child develops health issues or chooses a risky career later in life, as it secures their insurability at a young age.
• Locked-in premiums: Whole life insurance policies offer locked-in premiums, meaning the rates will not increase over time. This can be advantageous as the insured child will have lower rates compared to purchasing a new policy at an older age.
• Limited coverage amounts: Whole life insurance policies for children usually have lower coverage amounts, typically less than $50,000. This may not meet the child's needs in adulthood, and additional coverage may be necessary.
• Long-term commitment: Whole life insurance policies require a long-term commitment, and premiums must be paid regularly to maintain coverage. Cancelling the policy or failing to pay premiums can result in a loss of coverage and accumulated cash value.

Who should consider it: Parents with a family history of serious medical conditions

Parents with a family history of serious medical conditions should consider getting life insurance for their children. While it is rare for a child to pass away, it is not unheard of, and the financial burden of losing a child can be devastating. Life insurance can provide a safety net to help cover funeral costs and allow parents to take time off work to grieve without worrying about income.

Whole life insurance policies for children offer lifelong coverage, meaning that even if the child develops a serious medical condition later in life, they will still be covered as long as the premiums are paid. This can be especially important for children who may be at higher risk of developing health issues due to their family history.

Additionally, whole life insurance policies build cash value over time, which can be used by the child for various purposes, such as college tuition or paying for a wedding. The cash value grows tax-free, providing a financial cushion for the child's future.

However, it is important to note that life insurance for children can be a long-term financial commitment, and the rates of return may be lower compared to other investment options. Parents should carefully consider their financial situation and priorities before purchasing a policy.

Frequently asked questions