September 16, 2019

Life Insurance for Children

Read more about Life Insurance

Life insurance isn't just for adults. But is life insurance for kids a good idea? Can you use it as a college fund? Read on for the pros and cons of life insurance for children.

Child life insurance is marketed as a financial assistance tool that:

  • Protects your child's insurability (the ability for them to purchase more life insurance later in life)

  • Locks in affordable premiums while they are young

  • Covers funeral expenses or other end-of-life costs in case they pass away

  • Serves as an investment or savings vehicle for the child's future expenses

Keep reading to learn more if child life insurance makes sense for your family.

Child life insurance policies never lapse as long as you continue to pay the premiums. Once the child turns either 18 or 21 (depending on the policy), they can keep the policy and death benefit.

How Does Child Life Insurance Work?

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You have two primary options to insure your child: a child life insurance policy or a child rider on a term policy. Read on to learn more about each.

Child Life Insurance Policies

These policies are basically the same as a whole life insurance policy you'd purchase for yourself. The policy would pay a death benefit to a beneficiary should the child pass away. They do, however, cost significantly more than other options.

Some parents are attracted to this coverage because the policy has an investment portion that builds cash value.

However, there is a catch. This cash value is earned at a predetermined rate set by the insurance company. The growth rate can fluctuate year-to-year based on the earnings or profit of the company, unless the policy guarantees minimum cash value.

It could take 10 or more years before you see a return. Because you are also making monthly premiums, the cash value may or may not be greater than the premiums you paid.

Investing on your own or through a financial advisor may offer a higher return than the cash value portion of a child life insurance policy.

Child Rider on a Term Policy

This is an option most insurance companies offer when you purchase your own policy.

The rider would provide a death benefit if one of your children passes away. Typically, this rider covers all of your children (if you have multiple) and it's not expensive.

Most child riders range from $1,000—$10,000 in coverage. For $10,000 of coverage, you would likely only pay around $50 per year.

While not all insurance companies offer child riders, most do. You should work with a life insurance agent to determine what company would suit you and your child's needs best.

What Are the Pros and Cons to Child Life Insurance?

We examine the most common reasons to purchase child life insurance below.

Money for End-of-Life Costs

  • Pros
    Losing a child is tragic, and a life insurance policy could help ease the financial burden of a funeral and other bills. This can be especially helpful if the parent needs time away from work to grieve.

  • Cons
    The chances of a child dying are very slim. It may be a better option to set aside an emergency savings fund that can be accessed in case of a tragedy.

Qualifies the Child for Insurance Later in Life

  • Pros
    If your child develops a medical condition early in life, it may be difficult for them to qualify for coverage later in life. With a child policy, they have guaranteed ability to purchase more as an adult.

  • Cons
    Your child likely won't have any problem getting life insurance when they are older unless they were born with a medical condition, or have a high genetic probability of developing one. If they purchase in their 20s or 30s, their premiums will likely be very affordable.

    Another consideration is child life policies have a low death benefit, so it probably won't provide adequate coverage later in life. You will probably need to buy another policy for more sufficient coverage as your children age.

Can Function as a Savings Vehicle

  • Pros
    The savings component, called cash value, grows tax deferred. The policyholder can borrow against the cash value account (with fees), and the cash can be used for anything, like college or a vehicle.

    Most whole life insurance policies guarantee a small percentage of return on the cash value.

  • Cons
    Not all policies have a minimum rate of return. It could take 10 or more years before you see a return on your investment.

    There are also a number of fees associated with the policy and withdrawing against it.

Do You Need Life Insurance for Your Child?

Most child life insurance is unnecessary. However, it may be worthwhile IF your child was born with a medical condition that will make it harder to purchase life insurance in their future or they will die prematurely from the condition.

Because the policy won't lapse when they become an adult, you are guaranteeing they have some life insurance coverage when they are older.

If the above situations do not apply to your child, they probably don't need insurance. Why?

  • Your child has no income that needs to be replaced if they die.

  • The interest/cash value is earned at a predetermined rate set by the insurance company.

  • The growth rate can fluctuate year-to-year based on the earnings/profit of the company, unless the policy guarantees minimum cash value.

  • There are a variety of fees associated with the policy that decreases the actual cash return.

  • The chance that your child will not qualify for a policy in the future is slim. Most people can get affordable premiums if they purchase a policy in their 20s or 30s and will have no issues qualifying.

  • The insurance they are going to need as an adult will be much higher coverage than what they can qualify for as a child.

How Do You Purchase Life Insurance for Your Child?
Most life insurance companies offer child life insurance or child riders for your term policy. One of the most popular child life insurance companies is Gerber Life.

You'll need to add a child rider when you purchase your policy. Or you can purchase an additional policy once you have children and add the rider to the new policy.

Is Child Life Insurance a Good Investment?

Child policies are generally a form of permanent policy, meaning they have an associated cash value associated. When you pay your monthly premium, part of the premium pays off the policy , while the other part goes into a cash account that should grow over time.

These dollars can earn interest while the child grows and could offer assistance with future expenses (like college tuition). You can also borrow against or make cash withdrawals from the account.

But while some offer a guaranteed minimum growth, the cash value account typically has low interest rates. Also, you may incur fees if you borrow against the policy.

For these reasons, it's not recommended to use life insurance as an investment or savings vehicle.

There may be better options out there to act as savings vehicles. Keep reading to learn about them.

Even at a guaranteed cash value growth, it could take decades for the investment growth to match the premiums paid.

What Are the Alternatives?

If you want an investment or protection for your child, there are a few options to consider.

529 Plan
A 529 plan, or "qualified tuition plan," is a tax-advantaged savings plan designed to encourage savings for future education cost.

Contributions grow free of federal and state income taxes. Also, no income taxes are paid on the growth of the account when withdrawals are used for qualified expenses.

IRA
An Individual Retirement Account, or IRA, is an investment account that offers tax breaks for investing dollars for retirement. You add money over time and use it to purchase investments, like stocks, bonds, or mutual funds.

Eventually, the money can be withdrawn for retirement. Contributions are tax deductible, the investments are tax-deferred, and you can contribute a large amount each year.

Custodial Account
This type of account is set up by the parent save money they don't want the child to have access to yet. When you put funds into a custodial account, it belongs to the child, not you.

Money can only be used for expenditures that benefit the child. The child gets access to the account at age 18 or 21 (depending on the state in which you live).

One downside of a custodial account is if the amount exceeds a certain total, the child will have to pay taxes on it.

Name your child as a contingent beneficiary to your own life insurance policy.

If a child under 18 is a beneficiary, the insurance company cannot legally give them the death benefit. The process can then take an extremely long time, since the court system has to appoint a custodian for the funds to be released.

The primary beneficiary of your policy should be the child's legal guardian after your death. A will should specify that the death benefit is to be given to the children.

Bottom Line

Since the main purpose of life insurance is to replace an income and/or cover debt, your child likely doesn't need any coverage.

Before you purchase life insurance for your child, review your current finances and future financial goals. Ask yourself: Do I have enough life insurance for myself?

Talking to a financial advisor or life insurance agent can help you learn your options and understand what your needs are and if it's worth considering.

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