Should I Purchase Life Insurance for My Child?

Families have long debated whether or not life insurance for children is a worthy investment. Some advisors and agents believe it’s a smart financial move, while others believe the cons far outweigh the pros. The one point that most agree on – purchasing a life insurance policy for a child should be secondary to more critical investments. If you’ve built an adequate emergency fund, invested in a college fund for your child, have a solid retirement plan, and life insurance on yourself, then you can begin thinking about investing in a life policy for your child.

Let’s take a look at the pros and cons and let you decide for yourself.

Your Options

If you have a child under the age of eighteen, there are two types of policies you can purchase:

1) Rider on your own life insurance policy – When purchasing a term life policy for you or your spouse, ask your agent if the carrier offers a rider that would cover your minor child. This rider offers an affordable option for parents looking to buy a small term policy for their children. Coverage amounts are usually limited to $20,000 or less, with term limits of 10, 20, or 30 years.

2) Permanent policy – Your other option is to purchase a permanent policy on your minor child. While these policies are still typically for a small amount, it does extend the option for a little more in coverage. Policy coverage is generally limited to $50,000 or less, with coverage provided for a lifetime, or as long as the premium is paid.

Pros and Cons of Life Insurance for Children

Insurability for the Future

Pros: Many parents choose to purchase a life policy to protect their children later in life. Everything can change on a dime, and none of us really know what the future holds for us. Purchasing a permanent life policy can help protect against those unknowns, ensuring your child still has coverage, even if he/she is diagnosed with a serious disability or illness later on down the road. Not only does this ensure coverage later in life, it locks in the cost at a much lower rate. If your family history puts your child’s future insurability at risk, purchasing a life policy at a young age could prove beneficial.

Cons: While it’s impossible to know what the future will hold for your child, medically or otherwise, the chances of them becoming uninsurable are very small. Although family history will play a factor in insurability and premium, underwriters will also consider medical advances, making it easier to purchase a policy with chronic conditions such as diabetes and cancer. One should also remember that it’s very difficult to determine exactly how much coverage your child will need in the future.

Death Benefits

Pros: While your child doesn’t likely have any income to replace should they pass away, the death benefit is a great way to cover final expenses and any unpaid medical bills. With the proper rider, your child’s policy could even cover medical treatment prior to their passing.

Cons: If death benefits are your primary reason for considering a life policy for your child, there are more affordable ways to ensure these expenses are covered. Consider adding a rider to your own policy or, if this option isn’t available to you, consider purchasing a small, low-cost term policy instead. $10,000 should be enough to cover final expenses and the premium is much more affordable than a permanent policy.

Accumulated Cash Value

Pros: Unlike term insurance, permanent life policies accumulate tax-deferred cash value. This cash value can be used for future planning, such as a down payment on a new home or college tuition. For many, this is an effective way to help contribute to their child’s savings.

Cons: While many consumers find benefit in utilizing the cash value on a permanent life policy, there are some downsides as well. It’s important to keep in mind that policy loans and withdrawals will reduce the overall death benefit. A loan, coupled with annual policy fees, could potentially cause the policy to lapse, if not closely watched. If saving for your child’s future is your primary goal, consider purchasing a small term policy and putting the rest into a savings account. When properly managed, the savings account could yield higher results and offer you greater control over its assets.

Before You Buy

Before purchasing a life policy for your child, take a close look at your current financial situation and goals for the future. Meet with a trusted representative, who can help you paint the big picture, ensuring both your child and finances are protected.

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