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Life insurance for children
You can insure your kids as they grow up — but it's not always a sound investment.
A life insurance policy can cover your kids when they’re little and stick with them throughout their life. But for most parents, it’s an unnecessary expense.
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What is life insurance for children?
A life insurance policy for children works just like it does for adults. If they die during the time they’re insured, their beneficiary receives a payout from the insurance company.
A term life insurance policy covers them for a set amount of time, usually five to 30 years. A whole or universal life insurance policy can cover them for their entire life, and they may have the option to take over payments or choose a new beneficiary when they’re older.
The death benefit can be used to help cover the cost of funeral expenses and time off for the beneficiary to grieve. If they still have the policy when they’re older, it can also be used to support their spouse or children.
Should I get life insurance for my child?
Life insurance for children is often best for families with multiple investments for their children and/or families who have sick kids and are concerned about the future.
Factors to consider include:
- Future protection. As long as the premiums are paid, a permanent life insurance policy can continue to be active well into your child’s adulthood.
- Secures premiums for the future. Taking out a permanent life insurance policy can ensure that your child doesn’t have to worry about being denied due to health problems when they’re older. But for most healthy children, this isn’t necessary – and it can be an expensive guarantee.
- Potential savings. If you choose a policy that accumulates cash value, you can borrow against it to pay for school or other future needs. But you’ll need to pay the money back to preserve the death benefit, and there are less expensive and less risky savings products you could use instead.
- Burial expenses. In the event of the child’s death, the coverage would pay out benefits that could be used for end-of-life costs.
- Income during bereavement. Should enough coverage be bought, there’s the possibility that the family could supplement income if they need to take time away from work during the grieving process.
Who can I cover with my policy?
Typically, policies will cover any children of a certain age range who are legally dependent on you, including:
- Biological children
- Adoptive children
- Step children
How do I buy life insurance for my child?
Life insurance can be bought for your child either through a rider or as a separate policy. Coverage amounts, premium costs, added benefits, the ability to convert the policy and the length of the coverage all factor into which insurer you might select. Make sure to compare your options to get an idea of what it might cost.
A rider vs. a children’s policy
As mentioned above, there are two ways to buy insurance coverage for your child. The first is by getting a rider for a term policy that you’re purchasing for yourself. Term policies are active for a certain number of years and expire if you outlive them and don’t — or can’t — convert to a permanent policy. A rider is not an individual policy for your child, but is instead added coverage that you can buy on top of your policy that is meant for another member of your family.
The other option is to buy a permanent policy for your child. Permanent policies often cost more but guarantee coverage for your child’s entire life, so long as premiums are paid.
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What are the benefits of life insurance for my child?
- May cover multiple children. Depending on the insurance provider, you may be able to secure coverage for multiple children.
- No medical exam. Your child will likely not be subject to any sort of medical exam.
- Conversion to a permanent plan. Child mortality rates are low in the US — a young child’s odds of passing away within the next 20 years is less than 1% — so it’s incredibly likely your child will outlive a rider you purchase. Some providers account for this and allow for the coverage to convert to a permanent plan once your term ends or the child reaches a certain age.
- Savings opportunity. Similarly to the conversion, insurance providers may offer the ability to use the rider as a type of savings for college in the event that the plan is outlived.
What should I watch out for?
- Cost. Rider costs may be steeper than you’re able to afford upfront. Be sure to investigate the full cost of your policy and the rider, or the permanent policy for your child.
- Value. Often times the college-savings component doesn’t include any sort of interest. As such, it may not be the most effective savings tool.
- Coverage amounts. You’ll likely only find small coverage amounts, usually up to $50,000. Your child may be able to purchase additional coverage after a certain age, but that is another factor that depends on the insurer.
- Age restrictions. You may be faced with an age restriction for either yourself or your child. Check with any providers you’re comparing to confirm if the minimum age is being met and the maximum is not being exceeded.
- Eligibility. Though there are often no medical exams, your child may still not qualify for coverage. It’s important to carefully read over any underwriting criteria and speak with the insurance provider to confirm your child’s eligibility.
Is permanent life insurance a good investment for a child?
If you have multiple savings accounts and investments for your child, a whole or universal life insurance policy that accumulates cash value can be a great way to supplement their investment portfolio. But it’s usually not the best idea for the first or main way to invest money for their future.
Life insurance tends to have higher administrative costs than other investment avenues, which eats into your returns. You also don’t control how your money is invested, so you don’t have the power to change investment strategies as the market changes.
What are alternatives to life insurance for my child?
Life insurance isn’t the only way to help your child financially or build a contingency fund. You can start investing for your child’s future with a:
- 529 savings plan. A 529 plan is an account that allows you to save for your child’s education costs. The account is tax-advantaged and has an age limit, but funds can be used for qualifying education expenditures. Tuition, dorm costs and supplies are just a few costs that you may be able to use the funds for.
- Private tuition plan. Similar to a 529, certain private institutions offer savings plans for education costs.
- High-interest savings account. When you’re looking to save for more than just the cost of your child’s schooling, it may suit you to look into a high-interest savings account.
- Certificate of deposit (CD). A CD is a low-risk investment that can offer higher returns than a traditional savings account, particularly if you can commit to not touching it for several years or more.
Buying life insurance for your child is a huge decision, and you likely won’t have an answer right off the bat. As with the rest of life insurance, there are many moving parts to consider before you make a decision. Take your time and compare life insurers to figure out what fits your family’s needs best.
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