Should I Buy Life Insurance for My Child?

Child life insurance is a policy that covers a child's life that a parent, guardian or grandparent buys. The adult who buys it is called the policyholder, which means they own the policy and pay for it. That same adult is usually the beneficiary too, the person who receives money if the child dies while the policy is active.

Most child policies are whole life insurance, a type of permanent coverage that lasts the child's entire life and builds cash value, a savings-like fund inside the policy that grows over time. Death benefits on these policies usually range from $10,000 to $25,000, though some insurers offer up to $50,000. The policy also guarantees the child can get life insurance as an adult, even if their health changes between now and then.

For lower monthly costs, a parent can add a child rider to their own life insurance policy instead of buying the child a separate policy. A rider is an add-on, and one child rider can cover multiple children in the family. Rider coverage ends when the child reaches an age set in the policy, usually 18, 21, 25 or 26. This depends on the insurer and policy terms.

As the parent, you'll pay the life insurance premiums until the ownership transfers to your child at a certain age, usually 18, 21, 25 or 26. Your child can continue coverage, increase coverage amounts, cancel the policy and receive the cash value, or borrow against the funds that have built up.

If your child develops a health condition between now and adulthood, the guaranteed-purchase option still lets them add more coverage later without a new medical exam, the health screening insurers normally require before approving a policy.

Child life insurance offers guaranteed future insurability but comes with tradeoffs. The policies lock in coverage and build cash value, but they offer limited death benefits and slower cash value growth compared to other financial products.

Insurance regulations and available options vary by state. Talk to a licensed agent in your state for specific requirements and available products.

Most families size child life insurance to cover funeral costs and keep the guaranteed-purchase option available, not to replace income. Children don't earn income, so replacing lost income isn't part of the math the way it is with adult life insurance. 

The National Funeral Directors Association reported that the median cost of a funeral with burial and viewing is $8,300, and a funeral with cremation is $6,280, so the standard $10,000 to $25,000 death benefit on most child policies covers either cost with room to spare.

Parents who want a bigger guaranteed-insurability benefit should compare whole life riders that let a child buy more coverage later, at set ages or life events such as marriage, without a new medical exam. A licensed insurance professional can confirm how a specific coverage amount fits your state's funeral costs and your family's other savings goals.

Canceling a whole life child policy early usually means giving up money, not just coverage. Most permanent policies apply a surrender charge, a fee the insurer subtracts from the cash value if you cancel the policy in its early years. Because of this fee, the amount paid out is often less than the total premiums paid in, especially within the first 10 to 15 years of the policy. Insurers structure whole life pricing this way because the bulk of early premiums covers the cost of insurance and administrative fees, not the savings portion of the policy.

Canceling the life insurance policy also ends the guaranteed-purchase option, which lets a child buy more coverage later without a medical exam. A health condition that develops after cancellation could make new coverage harder or more expensive to get as an adult. 

Before canceling, ask the insurer for the policy's current cash surrender value, the amount you'd actually receive, compare it against total premiums paid, and ask whether a paid-up reduced policy, which lowers the death benefit but keeps some coverage active without more premium payments, or a partial withdrawal fits better than canceling completely.

Child life insurance locks in future coverage and builds some cash value, but most families have better uses for the money. Get your own life insurance first because adult coverage protects the household's primary income. After you've secured parental coverage and an emergency fund, a child policy is worth considering.

Death benefits are low and cash value builds slowly, so these policies rarely beat 529 plans or other investments. Child life insurance makes the most sense when a child has a health condition that makes future coverage uncertain, or when the child earns income of their own that needs protecting. Healthy children in budget-conscious households don't need it.