Weighing The Benefits: Exploring Term Insurance For Your Children's Future

Should I Keep My Term Insurance for My Kids?

Term insurance for children is generally considered unnecessary, as the primary purpose of life insurance is to provide financial support for loved ones after the policyholder's death. Since most parents do not rely on their children for income, purchasing term insurance for them is often seen as redundant. However, there are exceptions and unique circumstances where it may be beneficial.

Pros and Cons

While it is uncommon to rely on children for income, there are valid reasons why some parents, grandparents, or legal guardians may consider term insurance for their children. One key advantage is that it can be more affordable and accessible for the child to maintain coverage as an adult, especially if they choose a high-risk career or develop medical issues. Additionally, the policy can serve as a long-term savings mechanism, providing financial protection for future expenses such as education or end-of-life costs.

On the other hand, critics argue that the likelihood of a child's death is very low, and the money spent on term insurance could be better invested elsewhere. The coverage amounts are typically low and may not meet the child's future needs. Furthermore, the cash benefits offered by these policies often fall short compared to alternative investment options with higher interest rates.

Alternatives

Before opting for term insurance for your children, it is recommended to explore other financial strategies. You can prioritize building an emergency fund, saving for retirement, or paying off high-interest debt. Additionally, consider alternative insurance options, such as adding a child rider to your own policy, which provides coverage for your children at a lower cost.

Pros and cons of keeping term insurance for kids

Pros of keeping term insurance for kids:

• It guarantees that your child will have coverage even if they develop a health condition later in life.
• It locks in a low rate. You’ll never get a lower rate on life insurance than when a child is a newborn.
• It provides funds for funeral expenses.
• The cash value of a children’s life insurance policy grows tax-deferred.

Cons of keeping term insurance for kids:

• Children are less likely to die young and necessitate a death benefit; therefore, 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.
• It is a long-term commitment.
• The rate of return is low.

When is term insurance for kids worth it?

Term insurance for children is rarely worth it, as the primary purpose of life insurance is to provide a financial safety net for loved ones in the event of the policyholder's death. Since parents do not rely financially on their children, there is usually no need to purchase term insurance for them. However, there are a few scenarios where it could be beneficial:

• Family History of Medical Conditions: If your family has a history of genetic medical issues that are likely to develop in your child as they age, term insurance could be a good idea. This would ensure that they have coverage even if they develop a health condition later in life.
• Child with Disabilities: If your child has a disability or is at high risk due to illness, purchasing term insurance can guarantee their insurability and provide peace of mind.
• High-Risk Professions: If your child is born into a family with a history of medical issues or ends up in a risky profession as an adult, term insurance purchased during childhood can make maintaining coverage easier and more affordable when they reach adulthood.
• End-of-Life Expenses: Term insurance for children can provide a death benefit to cover funeral costs and other end-of-life expenses in the unfortunate event of a child's death.

While these scenarios may justify purchasing term insurance for your children, it is important to note that the chances of a child dying are very low, and there are alternative ways to save for your child's future. Before purchasing term insurance for your children, carefully consider your financial situation, family medical history, and the potential benefits and drawbacks.

Alternatives to term insurance for kids

There are several alternatives to term insurance for children. Here are some options:

• Child-only health plans: These plans are specifically designed to cover children's healthcare needs, including preventative care, injuries, illnesses, and other medical issues. They are available from multiple private insurance companies and can insure a single child or multiple children within an immediate family.
• Children's Health Insurance Program (CHIP): CHIP, also known as Medicaid, is a government-sponsored program that provides health insurance for children from low-income families. Coverage varies by state, but CHIP typically offers quality health coverage for children at a low cost.
• Major Medical Health Insurance: Also known as Affordable Care Act (ACA) or Obamacare insurance, this option provides comprehensive health coverage but can be expensive and may not always be available year-round.
• Short-Term Health Insurance: Short-term health insurance is similar to major medical insurance but is more affordable and can be obtained at any time throughout the year. However, these plans usually don't cover pre-existing conditions and have limited benefits.
• Fixed-Payment or Fixed-Indemnity Plans: These plans are an alternative when short-term plans are not an option. They often accept people with pre-existing conditions and provide a daily allowance for medical expenses, such as a hospital visit.
• Cost-Sharing Services: Faith-based cost-sharing services are typically affordable and cover most medical problems, but they usually won't cover pre-existing conditions. These plans are not traditional insurance but qualify as an ACA-approved alternative.
• Accidental Death Policies: These policies provide coverage in the event of death due to an accident and can be a more affordable option for parents with multiple children.
• Employer-Sponsored Insurance: If your employer offers group life insurance as a benefit, you may be able to add your spouse or children to the policy, even if they have pre-existing conditions.
• Mortgage Insurance: You can take out insurance on your mortgage, which will pay off the balance in the event of your death. This can be a good option if you want to ensure your child's living expenses are covered.
• Whole Life Insurance: While term insurance is solely a life insurance product, whole life insurance also includes an investment component. This means it can help cover the cost of your child's education or other future expenses. However, whole life insurance tends to be more expensive and may not be necessary if you already have term insurance.
• Savings Plans: Instead of life insurance, you may consider setting up a savings plan to cover your children's future expenses. Options include 529 savings plans, custodial accounts, and IRAs.

How to save for your child's future

While it is natural to want to secure your child's future, it is important to note that life insurance for children is generally unnecessary, as the primary purpose of life insurance is to provide financial support for loved ones in the event of your death. Instead, there are alternative ways to save for your child's future and protect them financially:

• Savings accounts: These are easily accessible and low-risk, making them ideal for short-term goals. However, they offer a low potential return and have special tax rules for minors.
• Managed funds: These offer diversification and risk options similar to insurance bonds but have different tax treatments. Managed funds pool your money with other investors to purchase various assets, providing a range of risk and return profiles to choose from.
• Insurance or investment bonds: These are suitable for families with long-term goals and marginal tax rates above 30%. They have special rules regarding contributions and withdrawals, and earnings are tax-free if no withdrawals are made for at least 10 years.
• Shares: Buying shares means owning a small part of a company, and if the company's value increases over time, you can make a capital gain. However, investing in shares is a high-risk option, so consider your investment timeframe and risk tolerance before investing.
• Superannuation: A super fund is a tax-effective, long-term investment where your money is professionally managed and can grow over many years. The returns are generally taxed at 15% within the fund, which can be attractive for investors.
• Junior Isa (Jisa): Anyone can contribute to a Jisa, and there is no capital gains or income tax to pay on these accounts. The money is locked away until the child turns 18, and they can then choose to spend it.
• Roth IRA: This is a tax-advantaged retirement account that allows anyone with earned income to make after-tax contributions, which can later be withdrawn tax-free. While primarily used for retirement, the flexibility of this account means you can use it for other purposes, such as education expenses.
• Custodial accounts: These are managed by a parent or guardian until the child reaches the age of majority and can be used to save for a child's future or education. However, these assets are considered when applying for financial aid, and there are no restrictions on how the money is used.
• Health Savings Account (HSA): If you have a high-deductible health insurance plan, an HSA can help you save for medical expenses tax-free. Anyone can contribute to the account, and your adult children covered by your insurance policy may be able to open their own.
• Taxable investment account: This option provides flexibility and is suitable for long-term savings, but it does not offer tax benefits, and the assets will be considered when your child applies for financial aid.
• ABLE account: These accounts are for individuals who experienced the onset of disability before turning 26. While the disabled person is the account owner, anyone can contribute. The accounts offer tax advantages and do not count against government assistance.
• High-yield savings account: If you need easily accessible funds for short-term goals, a high-yield savings account will earn more interest than a regular savings account.

It is also important to involve your children in the saving process as they get older. You can do this by giving them a dedicated place to save, such as a piggy bank or a savings account, and encouraging them to apply for scholarships and grants if they plan to attend college. Additionally, there are several mobile apps available that can help your children save money and learn about finance, such as gohenry, FamZoo, and Greenlight.

Types of insurance coverage for children

There are several types of insurance coverage for children, including health insurance and life insurance.

Health Insurance

Health insurance for children can be obtained through child-only health plans, family plans, or government-sponsored programs like CHIP (Children's Health Insurance Program). Child-only health plans are designed to cover children's healthcare needs, including preventive care, injuries, illnesses, and other medical issues. Family plans can also be used to cover children's health insurance.

In the US, CHIP and Medicaid are government-sponsored health insurance programs that provide coverage for children from low-income families. CHIP typically covers children in families with incomes too high to qualify for Medicaid but who cannot afford private insurance. The eligibility criteria and benefits offered by these programs vary by state.

Life Insurance

Life insurance for children is not necessary for most families, as it is intended to replace the income of the insured person, and children generally do not have an income. However, some families may choose to purchase life insurance for their children to cover burial expenses in the event of their death or to lock in a low rate for future insurance needs.

Life insurance for children can be purchased as a standalone whole life policy for the child or as a rider on a parent or guardian's term or permanent life insurance policy. Whole life insurance provides lifelong coverage as long as premiums are paid and includes a cash value component that grows over time. A rider on a parent's policy typically provides a smaller death benefit and may be converted into a separate whole life policy for the child when they reach adulthood.

Frequently asked questions