Children’s Life Insurance: Pros, Cons & If It’s Worth It

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One of the things every parent wants most in life is for their children to live long, healthy lives, which is why buying children’s life insurance is not usually at the top of their priority list. 

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There are some financial advisors and life insurance agents who wholeheartedly recommend life insurance for children. At the same time, others feel that it’s unnecessary and the money should either buy more insurance on the parent or be invested elsewhere.

In this article, we’ll look at children’s life insurance from all sides and talk about the pros and cons, the types you can choose from, alternatives to children’s life insurance, and more. 

What Is Children’s Life Insurance?

Children’s life insurance, also known as child life insurance, is typically purchased by the insured child's parents, grandparents, or legal guardians. It covers the life of a minor (someone under age 18). Most life insurance companies will issue a policy on a child's life once they have reached 14 days of age up until they turn 18.

Child life insurers typically limit the face amount, or death benefit, of a children’s life insurance policy to between $5,000 and $50,000. In addition, they utilize “simplified issue underwriting,” meaning a limited number of health questions are asked on the application, and no medical examination is required.

The average annual premium for a $25,000 whole life insurance policy on a newborn is $150, according to Quotacy, an online life insurance brokerage. A life insurance agent can provide you with a recommendation on how much life insurance you need

At certain ages, usually 21, the insured child can assume ownership of the policy and continue coverage, increase the death benefit, or cancel the policy altogether.

The primary reason adults insure the life of a child is to pay funeral expenses in the event of the child's death. The average cost of a funeral with a vault for an adult is $9,135; the price of a child’s funeral is similar, except for the casket being less expensive because of the difference in physical size. Many families can’t afford to pay this amount out of pocket, thus the need for life insurance. 

Are There Different Types of Children’s Life Insurance?

There are two different types of children’s life insurance available: whole life insurance and term life insurance. 

Whole life insurance is a type of permanent life insurance, and it has two components: a death benefit and a cash value account.

  • Death benefit: the amount of money paid to the beneficiaries of the life insurance policy. They are listed in the policy and selected when the insurance application is completed. In most instances, the owner of the policy can change the beneficiaries. 
  • Cash value: a portion of every premium dollar paid by the policyholder is deposited into the policy's cash value component. Money in the cash value account is credited interest at a rate determined by the life insurance company and can also receive dividends when the insurer declares they are paying them. All growth of the cash value in the account is on a tax-deferred basis.

As the cash value grows, it can be borrowed or withdrawn by the policyholder. 

The monthly payment (premium) on a whole life policy never increases once the policy is issued, and coverage will remain in effect for the entire life of the insured as long as premiums are paid. The death benefit of a whole life policy also remains constant for the life of the policy.

Term life insurance is considered temporary insurance because it expires at the end of a pre-determined period of time. It doesn’t accumulate cash value; it strictly provides a death benefit. There are some types of term life insurance for adults with which the death benefit can decrease during the term of the policy, but the death benefit for a child's term life policy remains constant.

Pros and Cons of Children’s Life Insurance

Every type of life insurance has its pluses and minuses, including children’s life insurance. Here are its pros and cons.

Pros of Child Life Insurance

Guaranteed future insurability: If your child has a serious health condition or the family’s medical history is a concern, children’s life insurance policies guarantee they’ll be approved for a policy when they become an adult. 

For example, Jerry’s family has a history of juvenile diabetes. As the recent father of a newborn, Jerry should seriously consider buying a child life policy for their new baby. A child policy would allow the baby to be covered as long as Jerry pays the premium, and some insurers would let the child convert the policy to an adult individual whole life insurance policy in the future, for up to double the face amount of the current child policy, without having to provide evidence of insurability. 

Your child could use the cash value down the road: Depending on the policy you select and the company that issues that policy, some children’s life policies let the child withdraw cash value from a whole life policy or take policy loans. This could benefit the child in the future by providing money to help pay college tuition, provide funds to help with the down payment on their first home, or other important future financial needs.

Helps cover final expenses if the child dies: As mentioned earlier, the cost of final expenses for an adult or child is beyond most family's means if they don’t have life insurance. Being faced with final expenses they can’t pay during a very devastating time is something no parent wants to face. 

Cons of Child Life Insurance 

Poor rate of return on the cash value: If you decide to purchase a child’s whole life policy because of the cash value feature, you should consider purchasing a term life policy instead and investing the difference in a mutual fund. The growth potential of many mutual funds is substantially greater than those of whole life insurance policies and could provide your child with considerably more money in the future to pay college costs.

Low probability of needing the policy: While it’s admirable to purchase a life insurance policy and is a sign of financial maturity, the mortality rates for children in the United States are, fortunately, very low. If you take out the policy when the child is a baby, you’ll likely pay premiums for 15+ years and never receive the death benefit. In that case, you would have been much better off investing those premium dollars elsewhere. 

High policy expenses: Life insurance policies for adults and children are loaded with policy fees and high commissions. Monthly fees erode the cash value growth of a whole life policy, and agent commissions can be as high as the entire amount of the first-year premiums paid.

Do You Need Life Insurance For Your Child?

Most financial planners advise their clients not to buy children’s life insurance, unless the child was born with a medical condition that will make it unlikely they’ll be able to qualify for life insurance in the future, or they’ll pass away prematurely from the condition. 

If the above situation doesn’t apply to your child, they advise against getting child life insurance because:

Your child doesn’t have an income that needs to be replaced if they die.

  • The interest and dividends applied to the cash value of a whole life policy are set by the insurance company. As a result, they generate what have generally been considered uncompetitive rates of return compared to mutual funds and other investments.
  • The growth rate of a children’s whole life policy will fluctuate from year to year based on the earnings and profitability of the insurer, unless the policy has a guaranteed minimum cash value.
  • High policy fees and commissions decrease return on investment.
  • The chances of your child not qualifying for life insurance in the future are slim.  Most young adults in their 20s and 30s have no issues qualifying for an affordable life insurance policy.
  • The amount of coverage they’ll need as an adult will be substantially higher than what they can qualify for as a child.

Alternatives to Children’s Life Insurance

As previously discussed, many financial advisors recommend that parents who are inclined to buy life insurance for their child purchase less expensive term life, not whole life, and invest the difference in premiums in another type of account. Here are three options:

529 Plan: Also known as a “qualified tuition plan,” a 529 plan is a savings plan with tax advantages designed specifically to encourage savings for future higher education costs. 

Contributions to a 529 plan grow entirely free of state and federal income taxes. Additionally, no income taxes must be paid on the account’s growth when withdrawals are used for qualified educational expenses. 

Roth or Traditional IRA: An IRA (Individual Retirement Account) is an investment offering tax breaks for investing money for retirement. The funds deposited into the account are used to purchase investments like stocks, bonds, or mutual funds. 

The maximum amount a minor can contribute to an IRA is the amount of earned income they have in a given year, up to the amount allowed by the tax code. The money in an IRA can be withdrawn before retirement if needed, but there will be early withdrawal penalties and taxes to consider. 

Custodial Account: This is an account set up by a parent to set aside money for the child that they don’t want them to have access to yet. The money deposited into a custodial account still belongs to the parent, not the child. 

Once deposited into the account, withdrawals can only be used for expenditures that benefit the child. When the child reaches the age of maturity (age 18 or 21, depending on the state of residence), the child gains control of the account. 

A Final Thought

It’s recommended that you don’t name a child under the age of 18 as a beneficiary of a life insurance policy because the life insurance company can’t legally pay them the death benefit. Because a child under 18 is considered a minor, the court system will have to appoint a custodian in order for the funds to be released, which can take an extremely long time and affect how long it takes to get a life insurance payout.  

To prevent this from happening, name the person who is going to be your child’s legal guardian after your death as the primary beneficiary of your policy, or have the death benefit paid into a trust for the benefit of your child. You’ll save a lot of time and expense. If in doubt, consult an estate planning attorney for advice.

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