Should you buy a life insurance policy for your child? We’ll go over the pros and cons of child life insurance and the types of coverage available to help you make a decision. But the short answer is, in most cases, no.
What Kinds of Policies Are Available for Children?
There are two types of life insurance for children.
A permanent policy (whole life insurance) covers your child for their entire life. Because your child is the one covered, you and/or your spouse would be the beneficiary(ies).
Permanent policies also build cash value over time. A small portion of every payment you make gets put into the cash value account. It earns interest at the rate specified when you buy the policy.
As the years go by, it can add up to a little nest egg for your child. Later in life, the policy’s beneficiaries can be changed to your child’s spouse and/or kids.
Some insurers also offer term policies for a child, designed to cover them until they grow up and are on their own. Term policies will be much more affordable than whole life policies, which make them a good option if you’re on a budget. If your child still wants coverage when the term has expired, they can apply for another term policy or a permanent policy. Prices will be low if they act quickly – the younger you are, the cheaper it is to buy life insurance!
Because of the big price difference between whole life and term life, policy type matters when we’re talking about the pros and cons of child life insurance.
Alternate Option: Child Rider
Another price consideration we have to mention when we talk about the pros and cons of child life insurance is the difference between individual policies and child riders.
A child rider is an extension of your policy that also covers all your children (natural, step, and adopted). It pays a small death benefit if any of them pass away before you. The best part is the price. Depending on the amount of death benefit you select, this additional coverage can be as little as a few dollars a month.
The catch? Most insurers do not let you add a child rider if you already had children when you bought your policy. If you didn’t have kids when you bought your policy, most insurers will let you add the child rider later.
Child Life Insurance: Pros
- Provides for final expenses. If your child happened to pass away before you, the death benefit could help with any final medical expenses or funeral costs.
- Ensures coverage is in place before potential health problems develop. Life insurance costs more for people with a chronic health condition. If your child is healthy but your family history points to the likelihood of problems developing, locking in coverage now can offset the cost of additional coverage later in life.
- Creates a nest egg. Whole life policies contain a cash value component. The earlier you buy the policy, the more that cash value grows. That money can help send your child to college in later years.
- The child’s policy does not expire if your personal coverage lapses. If you cover your child through a child rider on your policy, your child’s coverage is tied to that policy. If you let it lapse, or if the policy only covers the child up to age 25, for example, your child loses coverage. With their own policy, their coverage isn’t dependent on your coverage.
Child Life Insurance: Cons
- Low policy face value. Because children don’t have financial obligations, most insurers don’t offer large face amounts if you’re insuring a child. Coverage usually maxes out at $50,000 or less. Once they grow up and have a family of their own, they’re going to need additional coverage. It’s up to you to decide if it’s worth the money to pay for a little coverage now, when they’ll probably have to buy more later anyway.
- Not the only (or even the best) way to save for college. There are plenty of other options that can help you save up for potential college expenses. For example, a 529 account is a tax-advantaged saving account specifically designed for college expenses. In terms of whole life insurance, pay close attention to the rate of return and any fees the insurer may charge to access the policy’s cash value. Oftentimes, a simple savings account will provide all the benefits you’re looking for in terms of creating a nest egg for college.
- May be an unneeded expense. If you already have coverage, your child may be covered by a child rider on your existing policy. Check with your agent or insurer to see if this is the case. If so, also ask if your child has the option to convert that coverage to a policy of their own once they turn 18. If the answer is yes, it can save you money to hold off on buying coverage for your child at this time.
- Difficulty adding more coverage to a child policy later in life. Years later, if your child wants to add more coverage, it’s usually easier (and cheaper) for them to get a new policy. If they apply in their 20s or 30s and are healthy, term life insurance is extremely affordable. They’re likely to qualify for way more coverage than they could add using a previously existing children’s policy.
Summary: Pros and Cons of Child Life Insurance
So…should you buy life insurance for your child? Based on the pros and cons of child life insurance above, only you can make that decision. However, it often doesn’t make financial sense to do so.
You need to consider individual points like:
- Would it be cheaper to cover the kids using a child rider on your policy?
- Do you have multiple children to cover? If so, a child rider is a good bet.
- Are there more convenient and less expensive ways to save for college?
- Does your family health history point toward the likelihood of developing problems that would be expensive to insure later? If so, a policy may make sense to ensure at least minimal coverage is in place.
- Is your child contributing to your family’s income? If so, a policy may also make sense to provide your family with income replacement if anything were to happen to your child.