Child Dependent Life Insurance: What Parents Need To Know

Child-dependent life insurance is a type of life insurance that provides a death benefit or the policy's proceeds if a covered child dies. It is often provided by employers or through joint life insurance policies. While no one likes to think of having to bury a loved one, it's important to prepare for the financial implications of such a loss. If you are unprepared, you could be hit with an emotional and financial crisis simultaneously. Child-dependent life insurance is typically less expensive for a child and is usually only available up to a certain age.

Child life insurance policies

Dependent life insurance is a voluntary or supplemental type of insurance that pays out a death benefit if a covered dependent, such as a spouse or child, passes away. It is often obtained through an employer's group benefit plan but can also be purchased separately or added to an existing policy. This type of insurance is designed to cover the non-income-earning dependent's funeral and burial costs, which can be a significant financial burden.

When purchased through an employer, child life insurance is often offered in increments of a specific dollar amount, such as $2,000 or $10,000. The maximum coverage per child is usually limited, and the cost remains the same regardless of the number of children covered. Premiums for dependent coverage are typically automatically deducted from the employee's paycheck after taxes.

Coverage options and costs

Dependent life insurance coverage is often obtained through an employer's group benefit plan, but it can also be purchased as a standalone policy or an add-on to an existing individual life insurance policy. The amount of coverage available is typically lower for dependent coverage than for an individual policy. Coverage for dependents can be added to both individual and group life insurance policies.

Dependent coverage is generally offered in increments of a specific dollar amount, such as $2,000 or $10,000. For example, a plan might allow you to purchase up to $10,000 of dependent insurance per child, in increments of $2,000. Every plan specifies the maximum amount of coverage per eligible dependent, with the limits usually being higher for spouses than for children.

The cost of dependent life insurance varies depending on the number of dependents, the amount of coverage, and the age of the dependents. For children's coverage, the monthly premium is typically a fixed rate per $1,000 of coverage. For example, if the rate is $0.15 per $1,000 of coverage, $10,000 of coverage would cost $1.50 per month. Spouse coverage tends to be more expensive due to the higher risk of passing away. The rate for spouse coverage increases with age, typically increasing every five years.

When purchasing dependent life insurance, you can choose to cover your spouse only, your children only, or all eligible dependents. Most plans do not allow you to specify coverage for a single child, but the cost remains the same regardless of the number of children covered.

In terms of coverage limits, dependent life insurance policies typically cover funeral and burial expenses. The average cost of a funeral and burial is $7,848, and policy limits usually fall within this range. Group dependent life policies often offer coverage in thousand-dollar increments, such as $4,000, $6,000, $8,000, and so on. There may also be age limits for dependent children, with coverage typically available until the child reaches adulthood.

It is important to note that dependent life insurance is not always transferable if you leave your employer. Child life insurance policies generally cannot be converted, while spouse policies may have conversion options under certain circumstances, such as retirement or divorce.

Dependent life insurance for spouses

Spouses are usually defined broadly in dependent life insurance policies and include any person recognised as a spouse under state law, including common-law spouses. However, a domestic partner may not always be recognised as a qualifying spouse, depending on the specific group plan. It's important to review the terms of the plan to understand the specific definitions and eligibility requirements.

One advantage of dependent life insurance for spouses is that it often does not require a full medical exam, making the application process more convenient. Additionally, the coverage is generally sufficient to cover funeral and burial expenses. However, because this type of insurance is often tied to group employment plans, there is a risk of losing coverage if the policyholder leaves their job.

It's worth noting that dependent life insurance death benefits may be taxable under certain circumstances. If the employer pays for coverage exceeding $2,000 for a dependent, the full policy amount may be treated as taxable income. Consulting a tax professional is advisable to understand the tax implications specific to your situation.

Pros and cons of child dependent life insurance

Pros of Child Dependent Life Insurance

Child dependent life insurance provides several benefits, including:

• Easy qualification: Child life insurance policies often do not require a full medical exam or any medical exam at all, making it simple for children to get approved for coverage.
• Low rates: Life insurance premiums are typically lower for children since they are younger and healthier, reducing the risks for the insurance company.
• Accumulation of cash value: Some types of child life insurance policies, such as whole life insurance, accumulate cash value over time. This value can grow tax-deferred and be utilised by the child in the future for expenses like college tuition or a down payment on a home.
• Death benefit: In the unfortunate event of a child's passing, the death benefit from the life insurance policy can help cover funeral and medical expenses, as well as provide financial support for grieving parents who may need to take time off work.
• Lifelong coverage: Whole life insurance policies provide lifelong coverage as long as the premiums are paid, guaranteeing future insurability even if the child develops medical conditions later in life.
• Additional coverage: Child life insurance policies may include a guaranteed insurability rider, allowing the child to purchase additional coverage as they grow older.
• Financial protection: The policy can provide financial protection for final expenses, relieving parents and family members of the financial burden during a difficult time.

Cons of Child Dependent Life Insurance

There are also some potential drawbacks to consider before purchasing child dependent life insurance:

• Long-term commitment: Buying a whole life insurance policy for a child requires a long-term commitment to paying premiums. If the policy is cancelled or payments are missed, the money already paid towards premiums may be lost.
• Lower rate of return: It may take several years for the policy to accumulate enough cash value to equal the amount paid in premiums. Other investment options, such as a tax-deferred college savings plan, may provide a higher rate of return over a similar period.
• Opportunity cost: The money spent on life insurance premiums could have been used for other child-related expenses or investments.
• Insufficient coverage: The death benefits on child life insurance policies are typically smaller than adult policies and may not be sufficient to cover the child's needs later in life.
• Alternative options: If the family has substantial savings or is already investing on behalf of the child in tax-efficient ways, the additional cost of life insurance may not be necessary.

Is child dependent life insurance worth it?

Dependent life insurance is a type of insurance that pays out a death benefit if a covered spouse, child, or another dependent dies. It is often obtained through an employer's group benefit plan but can also be purchased as a standalone policy or an add-on to an existing insurance policy. The insurance covers funeral expenses and other costs associated with losing a non-income-earning dependent. While no one likes to think about the possibility of losing a child, there are financial obligations, such as funeral and burial costs, that may be worth considering.

Factors to Consider

When deciding if child dependent life insurance is worth it, there are several factors to take into account. Here are some key considerations:

• Cost of the insurance: Dependent life insurance for children is generally inexpensive, with coverage offered in increments of a specific dollar amount, such as $2,000 or $10,000. The monthly premium for children's coverage is often calculated per $1,000 of coverage. For example, a rate of $0.15 per $1,000 of coverage would result in a monthly cost of $1.50 for $10,000 of coverage.
• Probability of needing the insurance: Young children have a lower mortality risk than older adults, so the likelihood of needing to make a claim is relatively low. This is an important factor when deciding if the cost of the insurance is worth the benefit it provides.
• Existing coverage: If you already have adequate life insurance coverage for yourself, it may be sufficient to cover the costs associated with losing a child. Review your existing policies to determine if additional dependent coverage is necessary.
• Specific needs and circumstances: Consider your family's unique needs and circumstances. For example, if you have concerns about your child developing genetic conditions that could affect their ability to qualify for insurance in the future, obtaining dependent life insurance now may be a worthwhile option.
• Alternative options: If you are unable to afford dependent life insurance or feel it is not necessary, consider setting aside funds in a savings account specifically for funeral expenses or other costs associated with losing a child. While this option does not provide the same level of financial protection as insurance, it can help ease the financial burden during a difficult time.

The decision to purchase child dependent life insurance depends on various factors, including cost, probability of needing the insurance, existing coverage, and specific needs and circumstances. While the likelihood of needing to make a claim is low due to children's relatively low mortality risk, the insurance can provide valuable financial protection during a difficult time. It is important to carefully review your finances, consider potential worst-case scenarios, and compare insurance premium costs to decide if child dependent life insurance is worth it for your family.

Frequently asked questions