Your children’s future security can be secured by child life insurance. This is how you can decide if it’s right to do so.
Children living long and healthy lives are what we all want for our children. You should consider it though as it can lock you in to low rates and serve as an investment vehicle.
Find out more about this type life insurance and if it is right for you.
What is child insurance?
A parent or grandparent can purchase child life insurance to protect the life of a minor.
In general, these policies are whole life products — a type of permanent life insurance. As long as premiums are paid, coverage will last for the child’s whole life. Premiums are locked in so they don’t rise, which means that coverage amounts are often low (often under $50,000). According to Quotacy (a life insurance brokerage), the average annual premium for a $25,000 policy covering a newborn is $140.
Whole life insurance also builds cash value — the policy’s investment component. The account grows as a result of a portion of the premium that is paid.
The policy can be taken over by the child at certain ages such as 18, 21 or 22. They can continue coverage, buy more, or cancel the policy entirely. You have the option to keep ownership.
Life insurance for children: The pros and cons
These are the most popular features when deciding whether child life insurance is right to you.
1. Guarantees future insurability
Guaranteed purchase options are often included in child life insurance policies. It gives you the option to purchase a certain amount at a future locked-in health category,” Chantel Bonneau, wealth manager at Northwestern Mutual. The child can buy additional coverage without having to undergo a medical exam.
There are many policies that offer additional coverage. You may not be able to purchase more if you are older or have experienced certain life events like marriage.
Pros: This feature can be useful if the child develops a pre-existing condition, such as diabetes, or chooses a risky career, like becoming a pilot, both of which can dramatically impact the cost of insurance and your child’s insurability, Bonneau says.
Cons: Child life insurance is not recommended for healthy applicants in their 20s.
You can borrow against the cash value account, or withdraw money from it. The policy can be canceled by the child when he or she reaches adulthood and the funds can be repaid in full.
Pros: This money can be used to pay school fees and a down payment for your child’s first house. You don’t have to pay tax on the gains until the cash is withdrawn.
Cons: Cash value accounts are dependent on you paying premiums and can take time for them to grow. Financial advisors may recommend other investment options before you consider child life insurance.
Roxanne Martens from CGN Advisors in Kansas, a financial advisor, said that you can open a Roth IRA if it fits within your budget. Or, if saving for education is your goal, look at options like 529 plans or a taxable brokerage account, she says.
3. If the worst happens, it covers all costs
It can be very difficult to lose a child. You may also have to pay unexpected expenses. As long as you pay the premiums, child life insurance policies will pay a lump sum in case of death.
The payout can be used to pay for funeral costs or grief counseling. Bonneau states that it can be used to cover costs associated with running a business, if you are the owner and have to take time off.
Cons: It is not common for a child in the United States to die. According to the Centers for Disease Control and Prevention, the infant mortality rate in the United States dropped to an all-time low in 2018. The risk of not having coverage might be less than the cost of the policy.
Before you buy
Before purchasing life insurance for your child, you should evaluate your financial situation, review your investments, and assess your coverage needs.
Bonneau states, “If you had the choice between the parent who has life insurance and the child, in most cases, we need to protect that parent that is bringing in all of the money.”
Instead of purchasing separate coverage for your children, you might consider adding a child life rider to your policy. You may be able to convert child riders into permanent coverage if the term ends. These riders are not available from all insurance companies, and the coverage amount may be limited.
Martens says that workplace plans may offer more affordable coverage. Martens says that many times, they offer group policies for dependents. This can be a cost-effective way to get a small amount life insurance for your children.