What’s a Child Term Rider for Life Insurance?

Updated

The COVID-19 pandemic has led many people to contemplate things they never had before, including the need for life insurance for children. It’s not a pleasant topic, but according to a recent study by Life Happens, it’s become one of the most talked-about topics at dinner tables.

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If a child depends on you for support, why would you need to insure their lives? There are some reasons to consider it. Let’s take a look at child term riders, and you can decide if you should add one to your new or existing life insurance policy. 

What Is a Child Term Rider for Life Insurance?

A child term rider for life insurance is an optional rider you can add to your policy which pays a death benefit upon the death of one or more children or dependent you’ve named on the rider. It can’t be added to an adult’s term life insurance policy, but it’s often added to a whole or universal life insurance policy.

How Do Child Term Riders for Life Insurance Work?

Adding a child term rider to your life insurance policy can be a cost-effective way to insure your kids' lives without having to buy a completely separate life insurance policy.  

If you’re a parent considering adding a child term rider to your policy, here’s how it works.

  • Coverage is typically available for children 15 days of age up to 18-25 years. The upper end of the spectrum will vary by insurer.
  • Child riders are added to a parent’s policy. This is usually done at the time of purchase, but some life insurance companies will allow you to do it after the fact.
  • Parents will typically pay a flat fee for the rider, regardless of how many children are insured.
  • There is no medical exam required for a child to qualify. Coverage is generally not underwritten. 
  • Most child term riders cover the child until they reach age 25, which is considered “the age of maturity,” but this may vary among insurers.
  • Some life insurance policies allow you to convert some or all of the term policy into a permanent life policy, like whole life or universal life, when the child reaches the specified age of maturity, regardless of their health. 
  • Some insurers limit how much you can convert. For example, a policy may stipulate that you can only convert up to 5 times the original face amount of the rider. 
  • If you’re allowed to convert the term rider into a permanent policy but don’t do it, the coverage will expire, leaving the child with no coverage.

If you do convert the policy, the child will begin to pay the life insurance premium at the age when the policy is converted, which will be a much higher rate than when the rider was added.

How Much Does a Child Term Rider Cost?

Adding a child term rider to your policy is an inexpensive way to insure one child's life or multiple children. Keeping in mind that the rider covers all your children, you can typically add a $10,000 child rider for around $5 per month. In contrast, an individual permanent policy for a child can cost more than $100 per month. 

What’s the Difference Between a Child Term Rider and Child Life Insurance?

Much confusion abounds when it comes to life insurance and children. Isn't child life insurance just another way of saying child term life rider? No, there is a big difference. 

Simply put, a child term rider is an inexpensive, optional add-on to a parent's life insurance policy that pays a small death benefit to the parent upon the child's death. The death benefit can be used for anything, including funeral expenses. 

On the other hand, child life insurance is a more expensive, permanent life insurance policy issued in the child's name. As a permanent type of life insurance, the policy provides a death benefit to a named beneficiary. It also accumulates cash value that can be accessed by the child later in life.

Let's take a deeper dive into child life insurance.

What is Life Insurance for a Child?

Like a life insurance policy insures an adult's life, life insurance for a child is a contract with an insurance company that will pay a death benefit if the child dies as long as the premiums have been paid up to date.  

While insurance policies for adults usually have the insured person being the owner of the policy, child life insurance policies typically have a parent, grandparent, or legal guardian as the policy owner. The policy owner is most often the policy beneficiary and receives a payout if the insured child passes away.

The most common life insurance policy for a child is a whole life insurance policy. A whole life policy will cover the child's life for their entire life as long as premiums are paid. The cost of the policy is determined at the child's age when the policy is issued, and, unlike term life insurance, the premiums are guaranteed not to increase over time. 

In addition to paying for the cost of the life insurance, a portion of the premium goes toward building cash value. The child can access this while alive for any reason.

Insurance companies don't sell term life insurance policies for children, which would only cover the child temporarily, which is why some parents add the child term rider to their policy.

What are the Pros and Cons of Buying Child Life Insurance?

Like any financial product, child life insurance has its pros and cons. These will help you determine whether buying life insurance for a child is a good option for you. 

Pros

  1. It guarantees insurability. The biggest advantage of buying a life insurance policy for a child is that you guarantee your child can always have coverage, even if they develop a health condition when they’re older. In addition, many life insurers offer riders (at no additional cost) that let the policy owner buy more coverage in the future without answering medical questions or having a medical exam.
  2. It allows a lower rate to be locked in. Rates are never lower for anyone than when they’re first born. Life insurance rates increase every year you get older. Even though a child will be paying premiums over a longer period of time than if they bought life insurance as an adult, the total amount paid over the years can still be lower because of the much lower rates for a child. 
  3. It provides money for final expenses. The statistical chances of a child dying are low, which doesn’t make it a good reason to buy life insurance. But if it does happen, a child life insurance policy provides funds for final expenses, like funeral and burial costs. It can also allow surviving family members to take time off from work to mourn the loss of their child. 
  4. It builds cash value. A whole life policy will also build cash value when premiums are paid, but even more so in the early years of a child life insurance policy because the insurance cost is so low, and there is more time for the cash value to build up.

Cons

  1. It offers a low rate of return. Even though child life policies build cash value, they provide a low rate of return compared to other investment vehicles, like stocks or mutual funds. Whole life insurance policies normally have a guaranteed rate of return of 3% to 5%, while mutual funds can potentially generate much higher returns (non-guaranteed).
  2. It’s a long-term commitment. When you purchase a whole life policy, you should plan on paying premiums for decades. Even though your cash flow may periodically get tight, you might be able to use the accumulated cash value to pay premiums temporarily. However, that will result in less cash value for your child if they need it later in life.
  3. Coverage limits tend to be low. For example, some life insurance companies limit the face amount for child policies to $50,000 or $75,000. That's not going to be adequate coverage when your child is an adult and has many more financial obligations, like supporting a family. They'll likely need to purchase additional policies as an adult to have sufficient coverage, but there is no guarantee that they won't have developed health conditions and qualify for additional coverage.
  4. It’s a financial trade-off. When you decide to purchase life insurance on a child's life, you’re giving up money that you could use to support your child's well-being, like saving for their college tuition through a 529 college savings plan. 

Does It Make Sense to Buy Life Insurance for Kids?

As a younger parent, you should have enough coverage before buying life insurance for your child. Many life insurance companies even require you to have your life insurance policies with face amounts at least equaling the amount of coverage you want to buy for a child. 

You also want to ensure you’ve taken care of other financial priorities before buying life insurance for a child, such as building an emergency fund, saving for retirement, and paying off high-interest debt. 

If you have a substantial estate, buying life insurance for a child can be a viable strategy to transfer wealth to your children. Wealthy individuals can also benefit from the tax-advantaged growth of their whole life policy’s cash value, particularly if they’ve made the maximum allowable contributions to their retirement plans.  

Also, if your family has a history of chronic medical conditions, such as diabetes, it can make sense to insure your child. By taking out a policy on them when they’re young, you don’t have to worry if they’ll be able to qualify for coverage later in life should they develop a medical condition.

Final Thoughts

Many parents find it helpful to work with a financial planner when deciding whether or not to buy life insurance for their kids. A financial planner can look at your financial situation and help you make an educated decision. 

If you choose to work with a life insurance agent, work with an independent broker representing more than one insurance company so they can help you find the best policy at the best rate.

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