Should I Buy Life Insurance for Children- The COVID-19 pandemic has served as a powerful reminder of the importance of life insurance, prompting many to reevaluate their coverage needs.
In fact, a recent survey conducted by Life Happens, a non-profit organization dedicated to educating individuals about insurance, revealed that discussions surrounding life insurance have become a prominent feature at dinner tables. Surprisingly, a quarter of respondents admitted to purchasing life insurance as a direct response to the impact of the coronavirus.
While there may be various factors to consider when contemplating insurance for your children, it’s crucial to recognize that not all families will find it financially beneficial.
Before making a decision, it’s essential to understand the advantages and disadvantages associated with securing life insurance for kids. Let’s delve into the key aspects you should be aware of to determine whether this type of coverage is suitable for your family.
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What Is Life Insurance for a Child?
Life insurance for a child functions similarly to a policy for adults. It involves a contract between the policyholder (usually a parent, grandparent, or legal guardian) and an insurance company. By paying premiums on a monthly or annual basis, the policyholder ensures that the insurance company will provide a death benefit in the event of the child’s passing.
Unlike adult policies where the insured person is typically the policyholder, in a child’s policy, the child is the insured while a parent or guardian holds the policy. In some cases, the policyholder can also be the beneficiary, receiving the payout if the child passes away.
Children’s life insurance policies are usually whole life policies, offering lifelong coverage as long as premiums are paid. These policies often come with guaranteed premiums that do not increase over time. Additionally, a portion of the premium goes towards building cash value, which can be accessed during the child’s lifetime for various purposes.
While term insurance policies, which provide coverage for a specific number of years, are not available for children, it’s important to understand whole life insurance to evaluate its pros and cons. However, if you have a term life insurance policy for yourself, you may have the option to add a rider that covers all your children until they reach a specific age. At that point, the coverage can typically be converted to permanent policies for them, albeit at an additional cost.
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What to Know About Buying Life Insurance on Children
Obtaining life insurance for a child is a relatively quick and hassle-free process, especially compared to purchasing a policy for an adult. While you’ll need to complete an application, your child won’t have to undergo a medical examination, which is often required for adult applicants.
“The process was simpler and quicker than installing the latest meme for my Zoom background,” shared Stafford. “I filled out and signed one electronic form and simply waited while my teens’ underwriting was all done online.”
Generally, you can buy life insurance for a child aged 17 or younger, although certain policies may have lower age limits. For instance, the Gerber Life Grow-Up Plan sets the age limit at 14. Nevertheless, the coverage remains intact throughout the child’s life as long as the premiums are paid.
As the owner of your child’s policy, you can transfer the ownership to your child at any time, according to Henry Hoang, founder of Bright Wealth Advisors and Bright Life Insurance in California. It is common for parents to transfer policies to their adult children, who then take over the premium payments. In the case of Gerber Life policies, ownership is transferred to the child at age 21.
The Cost of Insuring a Child
The younger your child is when you purchase a policy, the more affordable it will be. With a whole life policy, the low premium rate you secure at the time of purchase remains guaranteed throughout the policy’s duration.
The cost you pay also depends on the coverage amount you choose, as well as the payment schedule you opt for. For instance, you may have the choice to purchase a policy payable until your child reaches the age of 65 or 100. Stretching out the payment schedule reduces the premium amount.
On the other hand, some insurers offer the option to pay off the policy within a specified number of years rather than over the child’s entire life. American Family Insurance, for example, provides 10-year and 20-year payment options for their children’s whole life insurance policy. Opting for a shorter payment period results in a higher premium, but it can be a viable choice if you wish to present your child with a policy that is already paid off.
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The provided sample rates below, sourced from an AAA-rated
life insurance company, illustrate the significantly lower monthly premiums for a whole life policy on a child compared to an adult. The rates shown are for a male insured.
Monthly Cost of $100,000 of Whole Life Insurance Payable to Age 65, By Age Purchased
Age Monthly cost of $100,000 whole life:
0 $44
15 $71
30 $127
Monthly Cost of $100,000 of Whole Life Insurance Payable to Age 100, By Age Purchased
Age Monthly cost of $100,000 whole life:
0 $38
15 $59
30 $96
However, it is important not to base your decision solely on the premium amount, as highlighted by Hoang. You should consider internal fees and review a policy illustration that demonstrates how the policy’s cash value will grow over time based on a guaranteed rate of return.
The cheapest policy may not always provide the best long-term value. It is essential to ask yourself, “Will it deliver greater benefits in the future?” The policy’s performance will determine whether the premium you pay is worthwhile.
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Should I Buy Life Insurance for Children?
Pros of Buying Life Insurance for a Child
Ensuring Future Insurability: The greatest advantage of purchasing life insurance for a child is the guarantee of coverage, regardless of any future health conditions. It’s a way to secure your child’s insurability, ensuring they can obtain coverage later in life without the need for a medical exam or proving insurability. This is especially valuable if your child develops a health condition or engages in risky activities like scuba diving.
Locking in a Low Rate: Buying life insurance for a child when they are newborn offers the lowest possible rates. As your child grows, the rates increase with each passing year. While the premium payment period may be longer, the total amount paid over time can still be lower due to the initially low rates. For example, a $44.46 monthly premium for $100,000 of coverage at birth could save you $20,000 compared to a $126.76 monthly premium for a 30-year-old paid over 35 years.
Covering Funeral Expenses: While the likelihood of a child’s death is low, a life insurance policy can provide funds to cover funeral expenses in the unfortunate event of such a tragedy. It can also alleviate the financial burden on the family, allowing them to take time off from work to mourn the loss.
Building Cash Value: Whole life insurance policies for children accumulate cash value over time. Since the cost of insurance is low and there’s more time for the cash value to grow, a larger portion of the premium goes towards building cash value. This extra time to accumulate cash can be valuable, and the cash value can be accessed for any purpose. However, keep in mind that withdrawing cash from the policy may have tax implications and reduce the death benefit.
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Cons of Buying Life Insurance for a Child
Low Rate of Return: While whole life insurance policies do build cash value, they do so at a relatively low rate of return. If your main goal is to save for your child’s education, a 529 college savings plan may offer higher returns compared to a life insurance policy. Investing in a 529 plan with an average stock market return of 7% could potentially double your investment within 10 years.
Long-Term Commitment: Purchasing a whole life insurance policy for a child means committing to paying premiums for decades. If cash flow becomes tight, canceling the policy may not be worthwhile, and using the cash value to cover premium payments can reduce the funds available to your child later in life.
Coverage Limits: Many insurers limit the coverage amount for children’s life insurance policies, typically to $50,000 or $75,000. As your child grows into adulthood and potentially starts a family, this coverage amount may not be sufficient. They may need to purchase additional life insurance as adults to ensure adequate coverage.
Financial Trade-Off: Buying life insurance for a child requires allocating funds that could be used for other purposes that support your child’s well-being. Since the likelihood of a child’s death at a young age is low, it’s important to evaluate if the money could be better spent elsewhere.
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When Life Insurance for Kids Does And Doesn’t Make Sense
Prioritize Your Own Coverage: Before considering life insurance for a child, ensure that you have sufficient coverage for yourself. Protecting the financial well-being of your loved ones should be a priority, and many insurers require parents to have their own life insurance policies with coverage equal to or greater than what they want to buy for their child.
Address Other Financial Priorities: Before purchasing life insurance for a child, make sure you have addressed other financial priorities such as building an emergency fund, saving for retirement, and paying off high-interest debt. Take care of yourself before considering coverage for your children.
Consider Individual Circumstances: While life insurance for a child may not be suitable for everyone, it can be a good solution for certain families. High-income parents might find it appealing as a way to transfer wealth to their children or benefit from tax-advantaged growth on the cash value portion of the policy. Families with a history of genetic medical conditions may also consider insuring their child to secure coverage in case of future health issues.
Protecting Future Insurability: Life Happens CEO and President Faisa Stafford shares her own experience of purchasing life insurance policies for her teenage daughters during the pandemic.
She wanted to protect their future insurability, ensuring they wouldn’t face difficulties obtaining coverage due to potential health issues. Consider working with a financial planner or independent insurance broker to assess whether life insurance for your children aligns with your overall financial situation.
In conclusion, the decision to buy life insurance for children should be carefully considered based on individual circumstances and financial priorities. It offers the advantages of future insurability, locking in low rates, coverage for funeral expenses, and building cash value.
It also has limitations such as a low rate of return, long-term commitment, coverage limits, and financial trade-offs. Prioritize your own coverage and address other financial priorities before deciding if life insurance for your children is the right choice for your family.
