Life Insurance for Children
If you have children or plan on having children in the future, you may be wondering – should I buy child life insurance?
The answer to this question is that it depends. While it might be a good idea for some families to have life insurance for their kids, it may not be the best option for others.
Keep reading to learn more about life insurance plans for children, what you can expect to pay, and if it's right for your own children.
What Is Child Life Insurance?
Child life insurance is usually purchased by a parent or guardian and covers the life of a minor. Usually, this is a form of whole life insurance, or permanent life insurance. In other words, as long as you keep paying the premiums, the child will have life insurance until they pass away.
In most situations, coverage amounts are low, often around $50,000, and premiums are locked in, so they won't go up. The average premium for $25,000 of coverage for a newborn is about $166 per year.
Because this is a form of whole life insurance, it usually comes with a cash value. At a certain age, usually about 21, the child can take ownership of the policy and continue the coverage, buy more, cancel the policy, or cash in on the accrued value.
Pros of Purchasing Life Insurance for Children
There are many perks of purchasing a life insurance policy for your kids – here are some of the most important benefits.
1. Securing Financial Protection for Unforeseen Tragedies
While no one wants to think about outliving their children, being prepared for any situation is always worth it. For example, if one of your children were to pass away unexpectedly, would you have enough savings to cover funeral expenses?
When you're grieving the death of a family member, the last thing you want to worry about is having enough money to cover death expenses. This is why many families opt for child life insurance – to be protected in any situation, including the rare possibility of losing a child.
2. Saving for the Future Through Cash Value Growth
When you get life insurance for your kids, chances are that it will be a whole-life policy. In many ways, you can look at this as a savings account for your kids since the cash value accrues over time.
What better gift to give your children than a nest egg when they move out? Your kids could use this cash value to pay for college, their first home, a wedding, or even to fund an emergency savings account.
3. Locking in Low Premium Rates Early
One of the best benefits of getting life insurance for your children is to lock in low premium rates as early as possible. Remember that as long as the premium gets paid, your child will have this life insurance until the end of their life. Unfortunately, the older you get, the more you'll pay in insurance premiums.
Not only will your child have financial peace of mind, but they won't have to worry about getting a high life insurance quote – they will already be protected for as little cost as possible.
Cons of Life Insurance for Children
1. Opportunity Cost of Other Investments
While whole life insurance has a cash value that can accrue interest, other savings options or investments may provide more of a return. For example, a 529 account is specifically designed for college savings and could be a better option.
However, you can only use a 529 account on education expenses – and what if your child chooses not to attend college? In this situation, a life insurance policy with a cash value offers much more flexibility for your kids as they get older – they can use the cash value on a variety of things or simply as an emergency fund.
2. Statistically Low Mortality Rates for Children
As you probably already know, children have very low mortality rates – luckily, it's unlikely that your kids will pass away unexpectedly. Because of this, your kids may not need a life insurance policy, especially if you need it as a backup for funeral expenses. In this case, a savings or investment account might be better.
3. Potential Misalignment with Family Priorities
Families have many expenses, including grocery bills, extracurricular activities, clothing, and vacations. Many times, the last thing parents want to pay for is extra insurance. Child life insurance may not be your priority right now, and that's okay. The good news is that if you need life insurance for your kids, the cost will be very low compared to life insurance for the adults in your home.
Key Factors to Consider Before Buying Child Life Insurance
There are many things to keep in mind before you purchase life insurance for your children – here are the most important factors to consider.
1. Financial Goals and Priorities
Consider your family's financial situation and future goals – and how a child's life insurance policy fits into them. Life insurance for your kids may be a good idea if you want long-term coverage with cash value growth. On the other hand, if your main goal is to save for your children's educational expenses, it might be best to go with a 529 plan or custodial account.
There are some other situations where you may need to get a life insurance policy for your child, such as:
- Your child is an actor or model and contributes their income to the family finances.
- Your teenager works part-time and helps with the household expenses from their income.
- Your teen babysits your younger children, so you don't have to outsource child care to someone else.
In these scenarios, your finances would take a hit if your child died prematurely, so it can be a good idea to make sure your bases are covered by taking out a life insurance policy for them.
2. Family's Financial Stability
Ask yourself a few questions to gauge your family's current and future financial situation:
- Do you have a sizable emergency fund?
- Are your and your spouse's life insurance needs fully met?
- Are you maximizing your investments?
If you and your spouse do not have life insurance or an emergency fund, prioritize those needs before worrying about your children.
3. Evaluating Policy Options
There are many different policy options that you should compare before pulling the trigger on life insurance. For kids, life insurance policies typically range between a few thousand dollars to $50,000 or more, depending on the insurer. Be sure to also look at the cash value component and verify that it aligns with your goals.
Alternatives to Life Insurance for Children
When preparing for the future, life insurance for your kids isn't the only option. Below, you'll find a few of the best alternatives.
529 College Savings Plans
A 529 plan is a tax-advantaged account that helps parents save for their children's education expenses. You can contribute to this account, and the money grows tax-free. Withdrawals are penalty-free for qualified educational expenses like tuition, books, and supplies.
If you know that the primary purpose of your child's life insurance is to save for college, a 529 account could be the better option.
However, not every child goes to college, so a cash accrual from a life insurance policy may offer more flexibility. Not to mention, a 529 account acts as an asset when your children apply for financial aid for college, which could reduce their eligibility for student aid. A life insurance policy doesn't count as an asset, which can be a pro when it comes to college savings.
Other College Savings Accounts
You can use custodial savings accounts like Uniform Gifts to Minors Act or Uniform Transfers to Minors Act – these allow you to put money in a trust for your children. You can also set up a Coverdell Education Savings Account (ESA) at a bank or brokerage firm to help pay your child's qualified higher education expenses.
Emergency Funds and Investments
If you want to plan for the worst while giving your child a nest egg as they enter adulthood, life insurance isn't your only option. An emergency fund or investment account can also work for this purpose.
For example, in the event of a premature death, you may be dealing with more than just funeral costs – there could be medical expenses and counseling. In this case, an emergency fund serves the same purpose, allowing you to pay for other additional costs.
Employer-Sponsored Life Insurance Riders
Many of you likely have employer-sponsored life insurance. With many of these policies, you can add on additional riders, which means you can add your children to the policy rather than paying for a brand new policy for each of them. This could save you money and make it much easier than opening up several different policies.
However, keep in mind that once you lose your job, you'll also lose your life insurance. A private policy can keep you covered no matter your employment status, providing more peace of mind.
Real-Life Scenarios of Child Life Insurance
There are many situations in which life insurance is an excellent investment for families and other scenarios when better options are available.
For example, the Smiths purchased a child life insurance policy for their 6-year-old daughter. Tragically, she passed away due to an unforeseen illness. Although no amount of money could genuinely lessen their grief, this policy's death benefit helped cover funeral expenses, grief counseling, and unpaid time off work, allowing the family to focus on healing without additional financial stress.
Here's another example – the Patel family bought a whole life insurance policy for their 2-year-old son. By the time he turned 18, the policy's cash value had grown significantly. They used the accumulated funds to help pay for his college tuition while the insurance coverage remained intact, providing lifelong protection.
Conclusion: Should I Buy Child Life Insurance?
Here's your takeaway - child life insurance can be a good choice if your child contributes to the family finances, if you want to provide a tax-deferred savings account for them, or if you simply want to be prepared for the worst.
No matter your reasons for getting child life insurance, making an informed decision is paramount. Carefully consider both the emotional and financial elements to determine if child life insurance is right for you and your family.
If you need help weighing your options or want to learn more about different life insurance options, contact Think Life today – we're here for you and your family's financial future.
Frequently Asked Questions
What type of life insurance is best for a child?
The best life insurance policy for a child is a convertible term or whole life policy – this will give them coverage later in life and even provide a cash value so they have more financial security as they get older. This can be an excellent option for college savings or to help them build wealth as an adult.
Can you take out life insurance on a child?
Yes, you can take out life insurance on a child, but there are some guidelines. Legal guardians, birth or adoptive parents, and family members with written consent are permitted to take out life insurance on children.
What is the youngest age to get whole life insurance?
Whole-life policies can be purchased when your children are as young as 14 days old. The adult who buys the policy is considered the policyholder – not the child.
Can I cash out my child's life insurance policy?
If you want to cash out your child's life insurance policy, you can surrender the policy. Basically, this means you are terminating it, and will therefore receive the accumulated cash value of the whole life policy.
How much life insurance should you have on your child?
In many cases, a $50,000 policy is sufficient for a child since they likely don't contribute to the household finances.