Life Insurance on Your Children
(Eight minute read time)
The decision to purchase a life insurance policy is one that many people make when they are navigating through life as a young adult, or when they find themselves with dependents. What many don’t know is that life insurance can be purchased for children as well, and it has the potential to be a savvy, forward-thinking decision.
Many don’t realize that life insurance on children is not only a preparation for the unthinkable - it can also be leveraged as a powerful investment tool, and it can guarantee future insurability for the child down the road.
Life insurance for your child might not be on the top of your mind when you’re in the midst of feedings and diaper changes, but it’s well worth looking into the pros and cons and deciding whether it’s the right choice for you and your family.
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What Is Life Insurance for a Child?
Just like a typical adult life insurance policy, a children’s life insurance policy is a contract with an insurance company that involves premiums that are paid on either a monthly or annual basis, and in return the insurance company agrees to pay a death benefit if the child were to pass away.
For most adult life insurance policies, the policyholder tends to be the insured person covered by the policy. When it comes to life insurance for children, however, the policyholder is the child’s parent, grandparent, or legal guardian. The policyholder is most often also the beneficiary who will receive a payout if the child dies.
The process of purchasing life insurance for a child is typically quicker and simpler than buying life insurance as an adult. It requires that you fill out an application, but there is no life insurance medical exam required for children, which is often necessary for adults.
Generally speaking, a parent or guardian can purchase a life insurance policy for a child who is 17 years old or younger, although the age limit can be lower in some cases. The insurance coverage remains intact throughout the child’s life as long as the premiums are paid, and the policy ownership and premiums (alongside control over beneficiaries, coverage limits, and other details) can be transferred to the child once they become an adult.
Types of Life Insurance Policies for Kids
If you’re interested in purchasing life insurance for your kids, you’ll have to decide on the type of policy. You’ll generally have to choose between a term life insurance policy and a whole life insurance policy, and there are some things to note when you make this decision.
Whole Life Insurance
Most life insurance policies for children are whole life insurance policies, which means that they’ll provide lifelong coverage as long as the premiums are paid. Those premiums are usually guaranteed, meaning they won’t increase over time. Additionally, a portion of the premiums goes toward building cash value which can then be accessed by the child later in life for things like education, collateral, and retirement.
While the coverage is lifelong, it’s important to note that the payments are not. Many whole life insurance policies can be set up to be fully paid over a period of 20 years, 10 years, or even 8 years, while the coverage lasts through the child’s lifetime and the cash value and death benefits continue to increase.
Term Life Insurance
Term life insurance policies provide coverage only for a certain specified number of years. Premiums remain the same for the length of the term, and funds are only accessed in the case of the death of the insured party.
Since the probability of a child dying is (thankfully) very low, you might also consider adding a Child Rider to your own term life insurance policy. This is an inexpensive way of maintaining future insurability for your child (more on that below) and giving you the option to make the policy permanent in the future.
Whole vs. Term Life Insurance
Here’s a breakdown of the basic differences to consider when choosing between a whole life insurance policy versus a term policy for your child:
Advantages of Purchasing Life Insurance for Your Child
Purchasing a life insurance policy for your child generally comes with three main benefits. It protects against expenses related to the child’s death, it helps to set the stage for insurability in the future, and it can be used as an investment vehicle or as an alternative to a Registered Education Savings Plan (RESP).
Protect Against Expenses in the Case of Death
No parent wants to think about the possibility of their child passing away. The unfortunate reality, however, is that accidents do happen and certain things in life are outside of our control, and neglecting to plan for unwanted events does not prevent them from happening. In fact, it typically makes them more difficult to deal with when they do arise.
In the case where the unthinkable happens, a life insurance policy on your child will cover the expenses of any funeral arrangements as well as provide some funds that would allow you to take some time away from work and grieve your loss. It acts to take some of the financial hardship out of a very difficult situation.
Future Insurability
The earlier in their life that a person acquires life insurance is typically correlated with the lower the cost of the premiums. This is because the probability of someone passing away at a young age is much less likely than a senior citizen, for example.
By purchasing life insurance for your child, you effectively lock in a lower premium rate and future insurability than if they were to purchase a life insurance policy for themselves as an adult (this benefit only applies to whole life insurance policies). Doing so also ensures that if the child develops a health condition at some point in their life which would typically make them uninsurable, the life insurance purchased for them as a young child will remain in effect.
The benefit of future insurability is always an asset, but especially so if your family has a history of conditions that might later render the child uninsurable if they become diagnosed themselves.
Investment
Whole life insurance policies can provide tax-free growth on the ability to withdraw from the policy and use those funds as collateral on a loan, to be put toward education, or as funds for retirement. Depending on the details of the specific policy, there are also opportunities to choose how to invest that money.
Unlike other investment avenues, life insurance has the potential to skip certain estate taxes if the insured passes away. This means that life insurance for your child is not only a strong investment vehicle, but it can also be a smart way to efficiently plan their estate.
Make the Right Choice for Your Family
While life insurance for your children is not required, it could be the right choice to protect your family in case of disaster and to set up your children for future success.
The right choice will come down to your values, your goals, and the specifics of your particular financial and familial situation. We recommend that you discuss purchasing life insurance for your children with a financial advisor for personalized advice on an important decision that will impact your children down the road.
Book a call with the experts at WealthTrack for more information on life insurance policies for children and individualized guidance pertaining to you and your family. We’ve got the expertise to help you make the right insurance decisions so you can focus on raising happy and healthy children!
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