Photo by Yousef Espanioly
Q: Should we buy life insurance policies for our young children?
A: No. Wait — yes. Actually… it depends.
We get this question often from customers and others visiting our website. If you posed this question to a group of insurance or financial advisors, you would surely get a heated debate along with a mixed bag of responses. I wish there were a simple answer to it but, like most things in life, your unique circumstances and perspective will dictate what’s best for you and your family.
That may sound like a cop-out, and maybe it is. But let’s reserve judgment on that until we take a closer look at the reasons why/why not you should/should not buy life insurance for your children. You may agree it’s not as black-and-white as it would appear.
Types of Life Insurance for Children
There are three types of life insurance available for children: term life insurance, a term life rider, and whole life insurance.
Term Life – Term life is inexpensive and provides coverage for a particular period or term. You can purchase a 20-yr policy for $50,000 coverage on a 10-yr old child at an annual rate of $85.00 from Genworth Life Insurance Company. At age 30, your child would have the option of extending the coverage on the policy, replacing the policy with a new one or converting the policy to a permanent policy such as Universal Life. Keep in mind all of these options would be at a much higher cost at that time.
Term Life Rider – A rider is an additional benefit added to an insurance policy. In this case, a children’s term life rider would be added to a parent’s policy. These riders max out between $10,000 and $20,000 worth of coverage and will cover your dependent children to a specific age, usually 23-25. You can purchase a children’s term life rider for $20,000 coverage at an annual rate of $120.00 from Protective Life Insurance Company. It’s important to note that one rider covers all of your eligible children. You don’t need a separate one for each!
Whole Life – Whole life insurance provides coverage for, well – your entire life. Unlike term life, coverage continues as long as the premiums are paid. You can purchase a whole life policy for $50,000 coverage on a 10-yr old child at an annual rate of $495.00 from Gerber Life Insurance Company. The rate on their Grow-Up Plan will vary depending on your state and your child’s gender. Some nice features of the plan are coverage doubles at age 18; the premiums never increase, and the policy builds cash value!
Reasons To Buy Life Insurance for Children
Provide a Savings Plan
A whole life insurance policy builds cash value that the policy owner can borrow from or cash out if the policy is turned in. With the Grow-Up Plan from Gerber Life, the policy’s cash value is guaranteed to be equal to or greater than all the premiums paid after 25 years.
Purchasing a policy for your child now could lock in their insurability for the future. Remember, a person has to show reasonably good health to qualify for life insurance. If your child develops medical conditions later in life, she may have difficulty obtaining life insurance. And while the likelihood of your child becoming uninsurable is very small, securing a policy now does provide protection against it.
Protect Student Loans
Your children may end up taking out student loans to help pay for college. And you may end up co-signing for those loans. If this is the case, a life insurance policy can provide protection for repayment of those loans should something happen before they can be paid back.
Provide Financial Support for a Grieving Family
Losing a child is a parent’s worst nightmare. I know I can’t imagine how I would ever be able to return to work if it were my child. A life insurance policy can help provide financial support until you and your family get back on your feet. At the very least, it can help defray funeral and burial costs.
Reasons Not to Buy Life Insurance for Children
Children Have No Income to Protect
The primary reason to purchase life insurance is to replace lost income. At least for adults. Of course, children don’t have an income to replace so many believe life insurance for children is a waste. If you have no other reasons to purchase, you’re much better off putting those insurance dollars toward a policy for you and one for your spouse. Your family will benefit considerably more by having coverage in place for Mom and Dad.
There are Better Savings Vehicles Available
Using a whole life policy as a savings vehicle alone is probably not a wise choice. There are plenty of better options available such as low-cost mutual funds, Education IRA’s and 529 plans. These tools have the potential for greater returns than a whole life policy, but there is no guarantee. Their returns will be dictated by the markets, whereas returns on a whole life policy are more predictable.
As you can see, you have a lot to think about when considering life insurance for your children. As I mentioned at the start, your decision will depend on your circumstances. But you don’t have to make it alone. Consult with a qualified life insurance broker and together find the best course of action for your family!