Should I Buy Life Insurance for Children: When considering whether to purchase life insurance for children, it’s important to weigh the potential benefits. Parents, grandparents, or legal guardians may have valid reasons for doing so, such as establishing a financial safety net, securing future coverage, or preparing for unexpected end-of-life expenses in the unfortunate event of a child’s passing.
However, it’s crucial to note that children’s life insurance isn’t suitable for everyone. To make an informed decision, it’s advisable to consult with a knowledgeable life insurance agent or representative from a reputable company prior to committing to a policy.
What Is Life Insurance for a Child? And Should I Buy Life Insurance For Children
Life insurance for a child provides financial protection in case of unfortunate circumstances. Unlike adult policies, purchasing life insurance for a child is a simple and straightforward process. While adults often need to undergo a medical exam, children are exempt from this requirement. Parents or guardians can complete an application, and the underwriting process is typically conducted online.
One satisfied policyholder, Stafford, shares that the experience of obtaining life insurance for his teens was as easy as installing a popular Zoom background meme. He filled out a single electronic form and waited for the underwriting to be completed online.
Most life insurance policies for children are available for those aged 17 or younger, although certain plans may have lower age limits. For instance, the Gerber Life Grow-Up Plan sets the age limit at 14. Once purchased, the coverage remains in effect for the child’s entire life, provided that the premiums are paid.
Furthermore, as the policy owner, you have the flexibility to transfer the policy to your child at any point. Henry Hoang, founder of Bright Wealth Advisors and Bright Life Insurance, explains that parents often transfer ownership to their children when they become adults, allowing them to take over premium payments. With Gerber Life policies, ownership is transferred to the child when they reach the age of 21.
Whether you’re a parent, grandparent, or legal guardian, you undoubtedly want the best for your child. Considering the possibility of unforeseen circumstances, such as illness or accidents, some individuals opt to purchase life insurance for their children or grandchildren. Several reasons make it worth considering buying a life insurance policy for a child:
- Ensuring future insurability: Children’s life insurance policies are often in the form of whole life insurance, offering coverage for the entire lifetime as long as premiums are paid regularly. This means that regardless of their current health or occupation, your child may have the opportunity to purchase additional coverage once they reach a certain age.
- Securing lower premiums: Premium rates are generally lower for younger individuals. By purchasing life insurance for a child early on, you can lock in these lower premiums. Insurance companies guarantee that the rates will not increase over time, providing long-term financial benefits.
- Building savings for the future: Whole life insurance policies include a savings component known as cash value. This cash value grows over time at a fixed rate and can be utilized as a loan or redeemed if the policy is surrendered.
Some insurance companies highlight these policies as a means of saving for a child’s college education. However, it’s advisable to consult a licensed financial planner to determine the most suitable approach for saving for your child’s future.
Who Shouldn’t Consider Buying Children’s Life Insurance?
Not everyone feels the need to purchase life insurance, and some parents, grandparents, or guardians may decide against obtaining coverage for their child. There are several reasons why one might choose not to buy life insurance for children:
1. Alternative ways to save for your child’s future: Depending on your risk tolerance and investment goals, there are various options available to save for your child’s future. These can include bank savings accounts, mutual funds, and 529 college savings plans. Additionally, certain types of life insurance policies for adults, such as variable life insurance, offer investment features.
2. Relatively low death benefits: Unlike life insurance policies for adults that can provide a death benefit of $500,000 or more, child policies typically offer a payout of $50,000 or less.
3. Affordability concerns: Generally, premiums for children’s life insurance policies are lower compared to those for adults. However, you may have other financial priorities or obligations that make it challenging to cover the premium for a child’s life insurance policy.
It’s important to carefully consider your individual circumstances and financial goals before making a decision about whether or not to purchase life insurance for your child.
The Cost of Insuring a Child
When considering whether to buy life insurance for your children, the age at which you purchase the policy plays a significant role in its affordability. According to Hoang, the younger your child is when you buy the policy, the cheaper it will be. With a whole life policy, the low rate you secure at the time of purchase will remain guaranteed throughout the policy’s duration.
The amount of coverage you choose to buy will also impact the premium you pay. Additionally, the payment schedule you select can affect the cost. For instance, you may have the option to purchase a policy that remains payable until your child reaches the age of 65 or 100, as suggested by Hoang. By stretching out the payment schedule, you can lower the premium.
On the other hand, some insurers offer the option to pay off the policy within a specified number of years, rather than over the child’s entire life. American Family Insurance, for example, provides 10-year and 20-year payment options for its children’s whole life insurance policy. Opting for a shorter payment period will result in a higher premium. However, this option is worth considering if you want to hand over a policy that is already paid off to your child.
The provided sample rates by Hoang demonstrate that premiums for a whole life policy are considerably lower for children compared to adults. These rates are from a highly rated life insurance company, and the figures shown pertain to males.
For a policy payable to age 65, here are the monthly costs of $100,000 of whole life insurance based on the age of purchase:
- Age 0: $44
- Age 15: $71
- Age 30: $127
And for a policy payable to age 100, here are the monthly costs of $100,000 of whole life insurance based on the age of purchase:
- Age 0: $38
- Age 15: $59
- Age 30: $96
It’s important to note that making a decision solely based on the premium is not advisable, according to Hoang. It’s crucial to consider internal fees and review a policy illustration that demonstrates the growth of the policy’s cash value over time, based on a guaranteed rate of return.
The cheapest policy may not necessarily be the best choice. Hoang emphasizes the need to ask whether the policy will provide greater value in the long run. The policy’s performance will determine whether the premium is truly worth it.
Pros of Buying Life Insurance For a Child
When considering whether to purchase life insurance for children, it’s important to understand the benefits and factors involved. Let’s explore some key reasons why you might consider buying life insurance for your child.
1. Guarantees insurability: One significant advantage of a life insurance policy for a child is the assurance that they will have coverage even if they develop a health condition later in life. Additionally, insurers often offer riders (at an extra cost) that allow you or your child to purchase more coverage in the future without undergoing a medical exam or proving insurability.
2. Coverage for high-risk activities: Buying life insurance for a child not only ensures insurability in case of health changes but also provides coverage if they engage in high-risk hobbies. For instance, activities like scuba diving, which insurers consider risky, can make it difficult for adults to obtain life insurance. By securing coverage for your child early on, you protect them against potential coverage challenges associated with such activities.
3. Locking in a low rate: The rate at which you purchase life insurance for a child is crucial because it will never be lower than when they are a newborn. Rates increase with each passing year, so starting early can result in significant cost savings over time. For example, the monthly premium of $44.46 for $100,000 of coverage at birth can accumulate $20,000 less over 65 years than the $126.76 monthly premium for a 30-year-old paid over 35 years, as demonstrated by Hoang’s rate example.
4. Funds for funeral expenses: While the likelihood of a child’s death is low, having life insurance can provide financial support in case the unthinkable occurs. If a child passes away, the life insurance policy can help cover funeral costs and potentially allow the family to take time off work to grieve the loss.
5. Cash value accumulation: Whole life insurance policies build cash value over time, and when purchased for a child, a larger portion of the premium contributes to this cash value. Since the cost of insurance is low for children, more of the premium is allocated towards accumulating cash value. This extra time for the cash value to grow can provide a valuable asset for future financial needs. However, it’s important to note that withdrawing cash from the policy may trigger taxes and reduce the death benefit.
By considering these factors, you can make an informed decision about whether to buy life insurance for your child, keeping in mind the long-term benefits and financial security it can provide.
SEE ALSO: Can I Cash in a Life Insurance Policy?
Cons of Buying Life Insurance for a Child
When deciding whether to purchase life insurance for children, there are several important considerations to keep in mind. Let’s explore these factors to help you make an informed decision.
1. Low rate of return: While whole life insurance policies do build cash value, it is important to note that the rate of return on these policies is relatively low. As a result, life insurance should not be viewed as a substitute for a dedicated college savings plan, such as a 529 plan, which can offer higher returns. According to Hoang, if you were to invest in a 529 plan with an average stock market return of 7%, your investment would double in 10 years, surpassing the cash value accumulation of a life insurance policy.
2. Long-term commitment: Purchasing a whole life insurance policy for a child means committing to paying premiums for an extended period, often spanning decades. It’s crucial to consider your financial situation and ensure that you will be able to sustain the premium payments over time. Cancelling the policy after a short period may not be financially beneficial, as the cash value accumulated may be reduced, limiting its potential usefulness for your child’s future needs.
3. Coverage limitations: Many insurers set limits on the coverage amount for children’s life insurance policies, typically capping it at $50,000 or $75,000. While this may seem like a substantial amount, it may not be sufficient once your child becomes an adult and needs coverage to support their own family. It is likely that your child will need to obtain additional life insurance as an adult to ensure adequate coverage.
4. Financial trade-off: It’s essential to consider the financial trade-off involved in purchasing life insurance for a child. By allocating funds towards life insurance premiums, you are diverting resources that could be used for other purposes that contribute to your child’s well-being. Since the likelihood of a child passing away at a young age is low, it might be more financially prudent to allocate those funds towards other priorities that can better support your child’s current and future needs.
By weighing these factors, you can make a well-informed decision regarding whether purchasing life insurance for children aligns with your financial goals and priorities. It’s important to consider alternative options, such as college savings plans, and determine the most effective use of your financial resources to support your child’s well-being.
Best Life Insurance Companies of 2023
According to US News, the top 10 insurance companies for 2023 are as follows:
- Haven Life
- State Farm
- Lincoln Financial Group
- New York Life
- Northwestern Mutual
- Guardian Life
if you are considering Should I Buy Life Insurance for Children? you might want to check out these insurance companies.
Is child life insurance a good investment?
Child life insurance is not a good investment. The cash value of the policies grows at a lower rate and comes with higher administrative fees than a traditional investment account. Instead, you can focus on a 529 plan to save for their future.
Should I Buy Life Insurance for Children?
Getting life insurance for your child can be worth it if you want to make sure there’s a safety net for your family in case your child passes away. There are some other benefits to getting life insurance for a child, such as potentially lower life insurance rates once they’re an adult. Talk with a financial advisor to understand the implications of purchasing life insurance for your child while they’re a minor