We all want our children to live long and healthy lives, which is why children’s life insurance may not seem like a top priority. It is worth considering though, as it can secure low rates and serve as an investment vehicle for your children.
Learn about this type of life insurance and find out if it’s the right choice for your family.
What is child life insurance?
Children’s life insurance covers the life of a minor and is usually underwritten by a parent or grandparent.
Typically, these policies are whole life products — a type of permanent life insurance. This means that the cover lasts for the life of the child, as long as the premiums are paid. Coverage amounts tend to be low, often under $50,000, and premiums are locked in, meaning they won’t increase. The average annual premium for a $25,000 policy on a newborn is $140, according to Quotacy, a life insurance brokerage firm.
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Whole life insurance also builds cash value — the investment component of the policy. Part of the premium is paid into the account, which increases over time.
At certain ages, such as 18 or 21, the child can become the owner of the policy and continue coverage, purchase more, or cancel the policy altogether. You can also choose to retain ownership.
The pros and cons of life insurance for children
When deciding if children’s life insurance is right for you, consider these three popular features.
1. Guarantees future insurability
Children’s life insurance policies usually include or offer a guaranteed purchase option. “It gives you the right to buy a certain amount of insurance at a locked-in health classification in the future,” says Chantel Bonneau, wealth management advisor at Northwestern Mutual. This means that the child can purchase additional coverage without having to undergo a medical examination.
The additional coverage available varies by policy, and your ability to purchase more may be limited at certain ages or life events, such as marriage.
Benefits: This function can be useful if the child develops a pre-existing conditionlike diabetes, or choosing a risky career, like becoming a pilot, both of which can have a huge impact on the cost of insurance and your child’s insurability, says Bonneau.
The inconvenients: Healthy applicants in their 20s are likely to get competitive rates, so if you think the chances of your child developing a medical condition are low, child life insurance may not be worth it. the penalty.
2. Acts as an investment vehicle for your child
You can withdraw money from the cash value account or borrow against it. When the child reaches adulthood, they can surrender the policy and receive the full funds.
Benefits: The money can cover costs like tuition or a down payment on your child’s first home. It also grows tax-deferred, meaning you don’t pay tax on the gains until you withdraw the money.
The inconvenients: Cash value accounts are dependent on premium payments and can take time to develop. Some financial advisors recommend exploring other options before considering children’s life insurance as an investment vehicle.
If it’s in your budget, you can open a Roth IRA for the child, says Roxanne Martens, financial advisor at CGN Advisors in Kansas. Or, if your goal is to save for education, consider options such as 529 packages or a taxable brokerage account, she says.
3. Covers costs should the worst happen
The loss of a child can be extremely painful and lead to unforeseen costs. Children’s life insurance policies pay out a lump sum in the event of death, as long as the premiums are paid.
Benefits: The payment can be used for expenses such as burial costs or bereavement counselling. It can also help cover the costs of running a business if you’re the owner and need time off, Bonneau says.
The inconvenients: It is relatively rare for a child to die in the United States. In 2018, the nation’s infant mortality rate dropped to an all-time low, according to the Centers for Disease Control and Prevention. Therefore, the risk of not being covered cannot outweigh the cost of the policy.
Evaluate your budget, review existing investments, and consider your own coverage needs before purchasing life insurance for your child.
“If you had to choose between the parent with the life insurance or the child, in most cases we have to protect the parent who brings in all the money,” says Bonneau.
You may want to consider adding a children’s term life insurance rider to your own policy instead of purchasing separate coverage for your children. In some cases, you can convert child riders to permanent coverage when the term is up. Not all insurers offer these endorsements and coverage amounts may be limited.
You can also find more cost-effective coverage through workplace insurance plans, Martens says. “Often they offer group policies for dependents, and it can be an inexpensive way to get a little life insurance for kids.”