If you’re a parent or guardian, buying life insurance for your children can give you a sense of security and help your kids in later life.
However, there are multiple options out there and finding the right one can be difficult.
This article will tell you everything you need to know about life insurance for children, what plans are available, and the pros and cons of each.
Just like life insurance policies for adults, children’s life insurance is a contract with an insurance company. However, these policies are bought by the child's parents, grandparents or legal guardian.
Premiums are paid—typically monthly or annually—in return for the guaranteed coverage that the insurance company will pay a death benefit if the child dies.
A life insurance premium is the amount of money the insurance company charges you for the life insurance policy you buy. The insurance premium is what you will pay to get life cover.
For example, think about car insurance. If you pay $212 per month to keep your car insured, your yearly insurance premium would be $2,544. You may have purchased a six-month policy, which would make your insurance premium $1,272.
In general, these policies are whole life insurance plans, which is a type of permanent life insurance policy. This means as long as the premiums keep being paid, that coverage will last for the insured person’s entire life.
Child life insurance policies usually offer a guaranteed purchase option, which means additional coverage can be bought without completing a medical exam.
A guaranteed purchase option (GPO), also known as the insurability option, is a life insurance feature.
With a GPO, a policyholder can buy coverage at designated life events or future dates without proving that they are in good health.
This can be useful if the child develops a serious health condition or chooses a high-risk career, such as a pilot or miner, because both can dramatically impact the cost of life insurance and your child’s insurability.
The policyholder can withdraw money from the cash value account of the policy. The cash value account refers to the portion of the policy that earns interest and is available for the policyholder to withdraw or borrow against.
When the child reaches adulthood, they have the option to have the value of the policy paid out to them in full.
This payout can cover costs like school fees or a down payment on their first home. It also grows tax-free, meaning you don’t pay taxes on the gains until you withdraw the cash.
The lump-sum payout in the event of the child’s death can be used to cover funeral costs, burial costs, medical fees, or grief counseling.
It can also help cover the costs of running a business if you’re the owner and need to take time off.
When applying for life insurance, healthy applicants in their 20s are likely to secure competitive rates. So if you think the chances of your child developing health complications are low, children’s life insurance is not worth it.
In the United States, it is relatively uncommon for a young child to die. According to the Centers for Disease Control and Prevention the country's infant mortality rate fell to an all-time low in 2019, with 5.6 deaths per 1,000 live births.
The risk of not having life insurance for your child may not outweigh the cost of the policy.
Whole life insurance policies for children rely on you paying premiums, and they can take time to grow.
Other options might be worth considering before choosing children’s life insurance for investment purposes.
One of these alternatives would be a Roth IRA, which is an individual retirement account for the child.
If your child’s future education is your main priority, options such as 529 plans—a tax-advantaged savings account—or a taxable brokerage account would be more appropriate.
Permanent life insurance policies can build cash value, but they do so very slowly. It takes roughly 15 years before the cash value of a policy breaks even with the premiums paid when you buy life insurance for a newborn.
When you take out life insurance for your child, you’re giving up money that could be used on other things to support their wellbeing.
Because it is unlikely for your child to die at a young age, your money might be better spent elsewhere.
Because of the low premiums and smaller death benefits, life insurance for children is generally more affordable.
Coverage amounts for child life insurance tend to be under $50,000.
Permanent life insurance, such as whole life insurance and universal life insurance, also build cash value through the policy’s investment component. A portion of the premium is paid into the account, which grows over time.
At the age of either 18 or 21, the child has the option to take ownership of the policy and continue coverage, buy more coverage, or cancel the policy altogether. However, the parent or legal guardian can also choose to maintain ownership.
While children’s life insurance policies can differ between providers, most policyholders will use the payout for funeral expenses, outstanding medical bills, and grief counseling costs.
It is hard to lose a child, and parents don't want to think about how to pay for the burial costs while they're going through a difficult time.
Depending on your plan, the policy can cover the price of the church ceremony, the type of burial, and other administrative matters.
If a child was sick before death, the parents are often left with unpaid medical bills. These bills could be for medical treatment or emergency care.
Life insurance policies can be used to pay off these financial debts, including hospital expenses, ambulance fees, and other medical costs.
Life insurance money can also be used to pay for grief counseling and therapy sessions for family members or loved ones.
This small measure of comfort can be very useful, especially when it would otherwise be viewed as a steep extra expense.
Other Ways You Can Use a Life Insurance Payout
From public tributes to scholarship funds, there are many ways you can use a life insurance death benefit to remember and honor your loved one.
Create a scholarship fund
By using the payout money to start a scholarship fund you can help keep a loved one’s legacy alive while working to improve the lives of others.
Support a loved one’s favorite cause
It’s common for people to create a memorial fund to support a cause the deceased cared about.
For example, if they were a nature lover, the family could start a memorial fund that is involved with environmental charities or projects.
Create a lasting tribute piece
If the deceased had a favorite place, the payout could be used to build a park memorial bench or plant a memorial tree.
These public tributes celebrate a person’s life and are becoming a more popular choice than a traditional funeral service.
A life insurance child rider is an optional feature that a parent or guardian can add to their own life insurance policy to cover the life of their minor.
This option is usually quite affordable, and you can get coverage (usually under $50,000) for anywhere between $15 to $50 per month.
Depending on the state you reside in, you have the option to convert your child rider into a permanent life policy when the child turns 18 or 21.
The ownership of the new policy is kept by the parent or moved to the child, but there are a few key differences between a child rider and a children’s whole life insurance policy:
Whole life insurance is permanent coverage
A child rider in a policy is temporary
A child rider in a policy doesn’t accumulate cash value
A whole life insurance policy does accumulate cash value
A child rider in a life insurance contract is relatively affordable
Whole life insurance will cost you more
529 plans are tax-advantaged savings plans designed to help pay for education. The two major types of 529 plans are savings plans and prepaid tuition plans.
Savings plans grow tax-deferred, and withdrawals are tax-free if they're used for qualified education expenses.
Tax deferral refers to situations where a policyholder can delay paying taxes until sometime in the future.
Prepaid tuition plans, on the other hand, allow the account owner to pay in advance for tuition at designated colleges and universities, locking in the cost at today's rates.
Life insurance for a child shouldn’t be a substitute for a 529 college savings plan.
Instead of waiting 15 years to break even on your life insurance policy premiums, you could invest in a 529 college savings plan and earn a 7% return—the average stock market return.
The amount you invested would double in 10 years. So in general, you can expect to see much higher returns by investing in a 529 plan than with a life insurance policy.
An IRA is a savings account that individuals can open to save and invest in the long term.
Similar to a 401(k) account—a company-sponsored retirement account—an IRA is designed to encourage people to save for retirement and has tax advantages.
If your child earns money or you have money to save for them, manage an IRA savings account for them and match their earnings to jump-start retirement savings.
A custodial account is a savings account opened and managed by an adult for the benefit of a minor.
Parents can save and invest in a custodial account to build savings for their children and hand the account over to them when they turn 18 or 21.
One of the benefits of a custodial account is that it has a lot of flexibility, with no income or contribution limits or withdrawal penalties.
Custodians of the account can't withdraw funds for their own benefit. The funds in the account must be used by the custodian for the benefit of the minor and not for personal gain.
If you’re interested in buying life insurance for children, learning about your life insurance coverage, or whole life insurance, we’ve got the latest information and articles to help you find a plan.
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If you have specific questions about life insurance providers, term life cover, or permanent life insurance, speak to a professional.