Any comprehensive financial plan includes, at a minimum, a discussion about life insurance coverage for adults. Having the best life insurance allows individuals to pass on financial stability to their loved ones and beneficiaries, through an income-tax-free payment upon their death. Life insurance benefits can help cover outstanding debts, such as a mortgage or a credit card balance, provide ongoing income for a child or a spouse, or leave a legacy for a beneficiary or a charitable organization.
There are several different types of life insurance policies available to adults, which can make the decision difficult. However, many people are surprised to learn that life insurance for children is also available.
Getting a life insurance policy for a child is not the right move for every family, but it is an option that may benefit some families. Life insurance for children protects the parent financially in the event of the child’s death, but not everyone agrees that this coverage is necessary. If you have children and are considering whether you should buy life insurance for them, first think through the benefits and drawbacks of this financial planning strategy.
On this page:
- How Life Insurance for Children Works
- Types of Child Life Insurance
- The Case for Purchasing a Policy
- The Case Against Purchasing a Policy
- Alternatives to Consider
How Life Insurance for Children Works
Having a life insurance policy on a child is similar to having coverage on an adult. Life insurance benefits are paid out upon the child’s death to the beneficiary, who is typically the child’s parent. In exchange for a monthly or annual premium, the life insurance company promises to pay a set amount to the beneficiary of the policy. While this is standard for nearly all life insurance policy options, parents can utilize certain types of life insurance for other uses while their child is alive.
Permanent life insurance or whole life insurance options that include a cash value component are the most common way parents put coverage in place for a child. This is because life insurance cash value may be used in the future for a variety of financial needs, including college savings, a wedding, or help with a first home purchase. The cash value of a life insurance policy for a child can be used while the child is alive, making it less of a traditional insurance benefit and resembling more of an investment or savings strategy for the long term.
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The need for life insurance as an adult is pretty clear to most people when they have a family and/or financial responsibilities. You don’t want to leave anyone you care about in a poor financial situation in the event of your death, so life insurance buys you that peace of mind.
Life insurance for a child might not be as clear of a choice, but it does have some important benefits to consider. Children’s whole life policies can be an investment vehicle for college costs while also guaranteeing your child’s future insurability.
In the unfortunate circumstance that your child has a major health concern that made them otherwise uninsurable as they got older, a children’s whole life policy or a child rider on parent’s policy would ensure that their coverage remains. Heaven forbid the child were to pass away, this life insurance protection also helps alleviate the financial burden of final expenses for a family during an already unbearable time.
Most people love the idea of a whole life policy that provides coverage until at least age 100 (now most carriers offer to age 121), but they don’t love the price tag that comes with it.
Term life is the most affordable type of life insurance available in the industry. It covers you for a specific period of time (a term of 10-40 years), and it is more affordable than whole life without the investment component of building cash value. However, the good news is, there are other permanent life insurance products, such as universal life or indexed universal life policies, that build cash value and are more affordable than whole life.
A common best-of-both-worlds strategy is to layer your coverage. This means having a term policy that holds the majority of your coverage while you need it most (your kids are young, you are paying off a mortgage or student loans). In addition, you would have a smaller permanent policy that keeps the cost more affordable and will be there for the rest of your life along with the investment component.
Types of Life Insurance Policies Available for Children
Life insurance policies for a child are available in the same forms and categories as life insurance for adults. Broadly, there are two types of life insurance products: term life and whole life. Each works differently in terms of the cost, coverage amount, and coverage length.
Term Life Insurance
Term life insurance is intended as a temporary life insurance policy. For adults or children, a term life insurance policy provides coverage for a set period of time, such as 10, 15, 20, or 30 years. At the end of the term, the insurance coverage is no longer in place.
Term insurance offers some benefit to those who are cost-conscious, as the temporary nature of this type of policy means premiums are relatively low. Term insurance on a child often cost from $5 to $15 per month, depending on the age of the child and the amount of coverage.
However, not many insurance companies offer term insurance for children under the age of 18. Any term insurance policy has a set premium for the life of the coverage, as well as a set death benefit. It does not provide any savings accumulation within the policy, like cash value.
>> Read More: Is term life insurance worth it
Permanent or Whole Life Insurance
Permanent or whole life insurance is meant to be long-term insurance. With a permanent insurance policy, individuals pay a premium and their beneficiaries are guaranteed to receive the death benefit, so long as premiums are paid during the child’s life. This long-term coverage also accumulates internal savings, known as cash value. The cash value of a life insurance policy can either be fixed, like in a whole life policy, or invested, like in a variable policy. Parents who have a permanent life insurance policy on their children may it as a savings vehicle for their children’s future financial needs or let it continue to accrue over time for longer-term savings.
Because of its long-term nature, permanent life insurance, even for children, comes at a higher cost than term coverage, but with more financial protection and additional coverage. For example, a $50,000 permanent life insurance policy for a 13-year old girl costs just over $37 per month.
>> Read More: Are You Eligible for Life Insurance?
The Case For Purchasing Life Insurance for Children
One of the benefits of children’s life insurance is that the cost of a policy is the lowest it will ever be, so long as the child is healthy. Insurance companies base the price of a life insurance policy on the age, gender, and health status of an applicant, and because of children’s young age and general healthiness, premium costs are minimal.
>> Read More: Life insurance rates by age
In addition, life insurance for children can provide valuable savings for the long-term. Specifically, the cash value in a permanent life insurance policy accumulates over time on a tax-deferred basis. Parents have an opportunity to borrow against this cash value in the future, or take out a partial withdrawal to help pay for a child’s expenses. These expenses may include college tuition or other substantial costs a child may incur.
Should a child pass away, life insurance works as a financial safety net for the parents. Even a small life insurance policy can pay for things like funeral expenses. So, having a life insurance on a child can help a parent maintain financial stability if their child passes away.
The Case Against Purchasing Life Insurance for Children
Some parents shy away from the thought of getting a life insurance policy for a child, particularly when the consideration revolves mostly around the death benefit of the policy. Life insurance death benefits are not often necessary for a minor child because the child does not have a dependent, property, or income to protect.
A child life insurance policy may also make little sense for parents who believe the cost of a policy – the premium – could be invested elsewhere and perform better over time. Other investment vehicles may offer more flexibility at a lower cost, and a greater opportunity for growth over the long-term. Some permanent life insurance policies like whole life policies have conservative internal investments that may not generate the type of return parents need for their financial objectives.
Alternatives to Consider
Aside from a life insurance policy, parents have several other options for saving for financial needs down the road. First, putting money into a high-interest savings account or an investment account is a simple option for ongoing accumulation. Savings accounts may provide a minimal amount of interest, but over time, contributions to savings can add up. These types of accounts also have no investment risk, meaning the amount put in, plus interest, is the amount that will be available for future withdrawals.
An investment account, such as a brokerage account that invests in mutual funds or an IRA, has the potential to earn more than a traditional savings account. However, stock market investments carry more risk. If investments perform poorly, or the broad market declines, your investment could suffer losses.
Another option specific to college savings is a 529 account. With this type of account, parents can set aside either monthly contributions or a single lump sum that is then invested up until the child enters college. A 529 account offers tax deferral on savings and investment gains, and in some states, a tax deduction for contributions up to certain limits. So long as savings in a 529 account are used for college expenses, including tuition, room and board, and books, the earnings on the account are tax-free when withdrawn.
Life insurance for children may not be the right choice for you as a parent, given the cost and long-term commitment to monthly premium payments. A life insurance policy may also fail to generate returns on cash value that are adequate enough to cover future expenses like college costs.
>> Read More: Is life insurance worth it?
However, life insurance is an option that should be considered as part of a well-rounded financial planning strategy for parents who have minor children. There are some benefits of using life insurance to save for future needs and cover unexpected losses in the event of death, but these benefits must be weighed carefully against the drawbacks.