Buying Life Insurance for Your Children: Pros, Cons & Alternatives
By, Freelance Personal Finance Writer
Life insurance for children is often misunderstood. While the primary role of life insurance is income replacement, children don't generate income, making the decision multi-faceted. In a child life insurance policy, you, the parent, serve as the beneficiary, not your child. The death benefit from such a policy provides financial support in the unfortunate event of a child's passing.
These policies can also complement other financial planning tools like Registered Education Savings Plans (RESPs), acting as a tax-deferral mechanism to secure your child's future. Life insurance policies for children are typically affordable, but they tend to offer lower coverage amounts.
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If your child has a higher mortality risk, child life insurance helps lessen the financial burden of final expenses and funeral costs.
The savings account portion of a child life insurance policy can be helpful for your child’s future since it’s a tax-deferred way to grow savings.
While a child life insurance policy can be a smart financial move, there may be better investment solutions to explore first.
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Understanding Child Life Insurance
Child life insurance is a specialized financial product that offers a death benefit in the unfortunate event that the insured child passes away. These policies are most commonly structured as whole life insurance, which means they come with a cash value component that accumulates over time. Ownership of the policy generally falls under the control of a parent, grandparent or legal guardian. Some providers offer coverage for children as young as 14 days old, making these policies accessible from an early age.
The primary objective of child life insurance is to alleviate the financial burden of funeral expenses and other immediate costs that may arise upon the loss of a child. However, the policy's cash value feature can also be a long-term savings vehicle. Over time, this cash value can grow, providing a financial cushion that the child can tap into later in life for various needs, such as education or a down payment on a home.
Pros and Cons of Buying a Child Life Insurance Policy
There are several benefits to purchasing a life insurance policy for your child, including deferring taxes and ensuring that you’ll have the financial means to take time off to mourn if you were to lose a child. However, it may not be the best fit for everyone.
Pros & Cons of Buying a Life Insurance Policy for Your Child
- Funeral funds: A child life insurance policy can be used to cover funeral expenses.
- Guaranteed insurability: Even if your child develops a health condition later in life, they’re guaranteed coverage as long as you continue to pay the premiums.
- Locked-in rates for life: Child life insurance typically takes the form of a whole life insurance policy, with rates that are locked in for life.
- Cash value: The cash value of your child’s life insurance policy will grow over time and is a tax-deferred vehicle for additional savings.
- Simplified underwriting: Child life insurance policies typically have simplified underwriting with fewer requirements.
- Low premiums: A life insurance policy for your child can cost as little as a few dollars a month, making it an affordable way to protect yourself and plan for the future.
- Better investment solutions elsewhere: While child life insurance policies are one way to invest your money, you may find solutions that offer a higher rate of return.
- Lifetime commitment: A whole life insurance policy is a lifetime commitment, which means that you’ll only maintain coverage if you continue to pay the premiums each month.
- Low coverage amounts: Unlike adult life insurance policies, which typically have coverage in the hundreds of thousands, child life insurance policies usually have a coverage amount of under $75,000.
Because of the low cost and simplified underwriting process, it’s usually fairly simple to take out a life insurance policy for your child. Such a policy can help provide a financial cushion in the event you experience a loss and can also be a way to grow tax-deferred savings.
That said, child life insurance policies aren’t the best fit for everyone. There are often more effective ways to invest in your child’s future. If you already have a healthy amount of savings, you may not need the financial security that such a policy provides.
Reasons to Buy Child Life Insurance
There are a few reasons you might consider purchasing a child life insurance policy, including providing a financial safety net for you to grieve after the loss of a child, investing in your child’s future and growing savings tax-deferred.
Like other types of whole life insurance, a whole child life insurance policy has a cash value that grows over time, which means that they’re one way you can invest in your child’s future. The cash value can be borrowed against or withdrawn to cover costs like college tuition.
By purchasing a whole life insurance policy for your child when they’re young, you guarantee that they’ll have insurance coverage when they’re older as long as you continue to pay the premiums. This is true even if they develop health conditions later in life.
Locked-in rates for life
Child life insurance policy premiums tend to be low, costing just a few dollars a month. These rates are locked in for life, which means that purchasing life insurance for your child is a relatively low-cost way to plan for their financial future.
While many people purchase life insurance for their child as part of a savings strategy, it also provides a financial cushion as a parent if you lose a child. This policy can help you cover final expenses and take time off to grieve.
Reasons Not to Buy Child Life Insurance
While there are several benefits of purchasing a life insurance policy for your child, it may not be the best fit for everyone. There are often more efficient savings and investment vehicles available, and such a policy may not be necessary if you already have significant savings.
It’s a lifelong commitment
Child life insurance typically takes the form of a small whole life insurance policy, which covers your child for life. However, there’s a catch: to continue coverage, you need to continue paying your monthly premiums. While child life insurance is relatively inexpensive, it’s still a lifelong financial commitment you may not always want.
Better investment solutions elsewhere
A life insurance policy is one way to invest in your child’s future, but there are often better investment opportunities. These include:
- 529 savings plans: A 529 savings plan allows you to save for your child’s future educational expenses, and funds can be withdrawn tax-free.
- Custodial accounts: Custodial accounts can be used by parents or grandparents to save and invest on their child’s behalf.
- IRA accounts: If your child earns income, they can open an IRA to begin saving for retirement.
- Your retirement accounts: While investing in your child’s future is a worthy goal, you should also consider investing in your retirement accounts. In retirement, you can use these funds to continue supporting your children or pass wealth down to them.
You aren’t insured yet
Before you purchase a life insurance policy for your child, you should ensure that you are insured. Some life insurance companies require that you be insured before you can buy coverage for your children. Plus, purchasing a life insurance policy for yourself can help ensure that your children are provided for if you die.
While some people purchase child life insurance policies to lessen the financial burden of a child’s passing, many also use them to secure their child’s future by using these policies as part of an overall savings strategy.
These policies have a tax-deferred cash value that continues to grow over time, and they also provide inexpensive, permanent insurance coverage for the rest of your child’s life.
How to Buy Child Life Insurance
Purchasing life insurance for your child involves several steps, each requiring careful consideration. From choosing the right policy type to understanding the cost implications, here's a step-by-step guide to help you navigate the process.
Assess Your Financial Situation
Before diving in, evaluate your current financial standing. Ensure you have adequate life insurance for yourself and have addressed other financial priorities.
Research Policy Types
Understand the types of policies available for children, typically whole life insurance, and what each offers in terms of coverage and benefits.
Obtain quotes from multiple insurance providers to get a sense of the market rates and offerings.
Review Policy Features
Look at the policy's features, including the death benefit, premium rates and cash value growth.
Complete the Application
Fill out the application form, which usually involves answering health-related questions about the child.
Cost of Buying Life Insurance for Your Children
Life insurance premiums vary due to individualized factors. Understanding the cost of child life insurance involves considering various factors that can influence the premium rates. These factors range from the child's age to the type of policy and additional features you may want to include.
- Child's Age: Premiums are generally lower for younger children. Starting a policy early can be a cost-effective strategy, as rates are locked in and remain constant as the child ages.
- Policy Type: Whole life insurance policies usually come with higher premiums compared to adding a child rider to a parent's existing term policy. The latter can be a more budget-friendly option.
- Coverage Amount: The size of the death benefit directly impacts the premium. A higher death benefit will result in a higher premium, so consider your financial needs carefully.
- Health Factors: Although most child life insurance policies don't require a medical exam, some may include a health questionnaire. The answers could potentially influence the premium rates.
- Riders and Add-ons: Opting for additional features like accelerated death benefits or premium waiver riders will add to the overall cost of the policy. Evaluate the utility of these add-ons in relation to their cost.
Alternatives to Life Insurance for Children
Depending on your goal, there may be several better options than a child life insurance policy. Whether you aim to secure a death benefit in the event of a worst-case scenario or invest in your child’s future, various alternatives may better serve your needs.
Alternative Investment Vehicles for Your Child’s Future
Child Life Insurance Rider
A child life insurance rider is similar to a whole life insurance policy for your child but is typically cheaper. Child life insurance riders usually take the form of add-on term life insurance that can be converted to permanent insurance when your child is older. If you’re primarily interested in providing yourself with a financial cushion to help you weather the potential loss of a child, a child life insurance rider serves the same purpose as a separate child life insurance policy, but often at a fraction of the cost.
529 College Savings Plan
If you’re looking to invest in your child’s future, a 529 college savings plan is a great way to do so. This type of plan can only be used for educational expenses, but if your child goes to college, it can be a great way to get a head start on saving to cover the cost of college tuition. Plus, funds can be withdrawn tax-free.
Registered Education Savings Plan (RESP)
Like 529 college savings plans, a registered education savings plan (RESP) can be used to cover educational expenses. This kind of plan is sponsored by the Canadian government and is only available to Canadian citizens. The government typically matches contributions up to a certain percentage. While withdrawals are taxed, students who withdraw funds while in college typically have a minimal tax burden since their income is often low.
Custodial accounts are another way parents and grandparents can invest in their children's or grandchildren's future and provide them with a financial safety net. Funds can be withdrawn at any time as long as they benefit the child, and there are no income limits, contribution limits or withdrawal penalties. Depending on where you live, funds in a custodial account will be transferred to your child's control when they turn 18 or 21.
IRA Savings Account
If your child earns an income, they can open an IRA savings account. They can choose between a traditional IRA, which is tax-deferred, or a Roth IRA, which is taxed upfront but offers tax-free withdrawals for retirement. Children can contribute up to the amount they have earned working, but contributions can’t exceed their overall income. Since children typically have a lower income and are taxed at a much lower rate, this investment vehicle can provide serious savings in the long term.
Your Retirement Accounts
While it’s a noble impulse to want to invest in your child’s future, you shouldn’t neglect your retirement accounts. Investing in your retirement by contributing to a 401(k) or IRA can help to ensure that you can cover your expenses in retirement, which can lessen the financial burden on your children. It can also be another way to continue to grow your savings so that you can pass them down to your children in the future.
While child life insurance is one way to invest in your child’s future, it’s far from the only one. When possible, it’s often a good idea to allocate a percentage of your portfolio to higher-risk investments, like stocks.
Although these investments are more volatile, they typically yield better returns in the long run. If you have questions about your investment strategy, you may want to speak with a financial advisor to ensure you’re on the right track.
Buying Life Insurance for Newborns
It's possible to purchase a life insurance policy for your newborn for only a few dollars a month. Such a policy not only provides a financial safety net in the tragic event of a child's passing but also serves as a savings vehicle for your baby's future. It's important to note that life insurance coverage does not apply to an unborn child and can only be purchased post-birth.
Purchasing life insurance for a newborn comes with its own set of implications. One of the key advantages is the ability to lock in low premium rates from the get-go, which remain constant as the child grows older. This early start also guarantees the child's future insurability, irrespective of any health issues that may arise later in life.
Make sure you weigh this decision against other financial priorities and savings options, such as Registered Education Savings Plans (RESPs), to ensure a balanced financial strategy for your child's future.
Compare Life Insurance Rates
Ensure you're getting the best rate for your life insurance. Compare quotes from the top insurance companies.
Frequently Asked Questions About Life Insurance for Your Children
Child life insurance can sometimes be confused with adding your child as a beneficiary on your own life insurance policy. We’ll cover some common questions and concerns about buying life insurance for a child.
About Margaret Wack