Should You Buy Life Insurance for Children?

Can a Parent Take Out a Life Insurance Policy for a Child?

Insurers offer parents and legal guardians life insurance policies for their minor children. The application process is straightforward, and there are no medical exams or bloodwork required.

Child life insurance is typically a form of whole life coverage that covers your child for their entire life (assuming premium payments are made). Child life insurance policies also accumulate cash value over time and pay a monetary benefit when the child passes away.

The child is the insured party on the policy, and the policyholder is generally a parent, legal guardian or grandparent. The beneficiary of the policy can be the policy holder or another person chosen by the individual who purchases the policy. Premium payments are the responsibility of the policyholder and can be made monthly, quarterly or annually, depending on the insurance provider.

Ownership of most child life insurance policies automatically transfers to the child when they turn 21, but can be transferred at any time.

Reasons for Buying Life Insurance for a Child

Given its long-term value, buying a child life insurance policy may seem like a sensible move, but be sure to weigh the pros and cons before deciding.

Pros:

• Policy payouts help cover funeral and burial costs. According to the National Funeral Directors Association, the average cost of a funeral with a viewing and burial is $7,848. If your child passes away unexpectedly and you have little or no money saved, you could face financial hardship.
• Help ensure your child can get coverage as an adult. Many parents buy life insurance policies for their children to protect their future insurability if they develop medical issues that prevent them from getting coverage later on. The death benefit on some policies can also be increased when your child reaches adulthood.
• Provide a way to save for your child's education. Your child can take tax-free withdrawals against the accumulated cash value of the policy to pay for college tuition.

Cons:

• Policies are a lengthy commitment. You'll be responsible for premium payments until the policy builds up enough cash value to pay for itself. If you experience financial hardship before this happens, you could be forced to surrender the policy or use the built-up cash value to cover payments.
• Policies for children have a lower earning potential. Some parents use life insurance as a vehicle to save for their child's higher education expenses. However, you may get better returns with a 529 plan or Coverdell education savings account (Coverdell ESA).
• Withdrawals could result in fees and taxation. Any withdrawals against the policy that exceed the policy basis, or amount you've paid in premiums, is subject to taxation. Excessive withdrawals will also lower the policy payout.

Alternatives to Buying Life Insurance for a Child

Depending on your child's age and coverage amount, you could pay anywhere from $5 to $35 in monthly premiums for $10,000 to $50,000 in coverage. But if you'd like to explore other options, consider these alternatives to protect your children and help them get a good start financially:

• Explore group coverage for dependents. Check with your employer to determine if coverage is available for dependents. Be mindful that the policy will only remain active while you're with the employer unless you opt to continue coverage when you leave your job.
• Add a child term rider to your policy. If you have term coverage for yourself, consider adding a children's term rider to your policy. They're typically offered at a low cost and cover your children until they reach early adulthood or get married. Plus, you could convert a term rider to a whole life policy for your child when it expires without them having to undergo medical underwriting.
• Open a dedicated savings account. These accounts are designed to help consumers save money for specific goals. The average rate of return can be relatively low, but there are upsides. You'll make deposits for a set period instead of paying premiums for several years, and the funds are accessible at any time.