Whole Life Insurance for a Newborn Baby: Pros, Cons & If It’s Worth It

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Though some financial advisors would disagree, there are many parents and grandparents that buy life insurance for a newborn baby as soon as they can. They typically own life insurance on their own lives and believe that having life insurance is a way to show how much they care about the financial security of their loved ones. 

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While this is a noble reason to buy life insurance for a newborn baby, is it a smart move financially for them and the child? This article will attempt to answer that as we delve into life insurance for babies: how it works, what it costs, when it’s worth it, when it’s not, how to find the best whole life insurance policy for babies, and more. 

How Does Whole Life Insurance for a Baby Work?

Life insurance specifically designed for babies can usually be purchased between fourteen days and six months after birth, depending upon the life insurance company that issues the coverage. There are a handful of quality life insurers that offer coverage for babies, and their policies’ features and benefits will vary. 

The minimum amount of life insurance (face amount or death benefit) is typically between $5,000 and $50,000, which is considerably less than the amount adults can apply for. Some insurers will double the death benefit when the child reaches 18 years of age.

The only people that can purchase life insurance for a baby is a parent, stepparent, adoptive parent, legal guardian, or grandparent, per company policy of most insurers that sell life insurance for newborn babies, and some companies will automatically transfer ownership of the policy to the child when they turn 18 or 21 years old. 

Companies that sell life insurance coverage for babies offer only whole life insurance. They no longer offer term life insurance for babies since there is little need for parents to purchase a type of life insurance that expires at such a young age, considering that mortality rates for children are very low.  

What Is a Whole Life Insurance Policy for a Newborn Baby?

The features of a whole life insurance policy for a newborn baby are the same as whole life insurance for adults. 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 life insurance policy's beneficiaries. 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 and can be withdrawn or borrowed 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 insured's entire life as long as premiums are paid. The death benefit of a whole life policy also remains constant for the policy's life.

How Much Does Life Insurance for Newborns and Children Cost?

The exact amount you pay to insure a newborn or child depends on several factors, including their age, the policy’s death benefit amount, and the company issuing the policy.

For example, the chart below shows the price rates for children’s life insurance from Mutual of Omaha, one of a number of life insurance companies that issue policies for children.

AGE

$10,000

$20,000

$30,000

$50,000

0–4

$4.61

$8.21

$11.82

$19.03

5–9

$5.43

$9.86

$14.29

$23.16

10–14

$6.15

$11.30

$16.44

$26.74

15–17

$7.75

$14.49

$21.24

$34.74

Pros: Why Purchase Life Insurance for a Baby?

There are several reasons people buy life insurance on the life of a baby.

The first reason is guaranteed insurability. By buying a whole life policy on a newborn, the purchaser is ensuring that the baby will have life insurance coverage for their entire life, regardless of any changes to the condition of their health in the future. 

Many whole life policies for newborns also have riders attached to the policy that allows the child to buy additional coverage at various points during their life without answering any health questions on an application or undergoing a medical exam.

Another benefit for the newborn is the cash value that will accumulate with their whole life policy while they’re growing up. Though it will take time to grow because the premiums are so inexpensive, the cash value can be used later in life to help pay for a wedding, fund education, serve as part of the down payment on a house, or just be a safety net during the rocky financial times most young adults eventually encounter. 

Life insurance on the life of a baby also protects the parents. If tragedy strikes and the insured child passes away, the death benefit will help pay for final expenses, such as remaining medical costs and funeral expenses, which can easily exceed $10,000. 

Cons: Reasons Not to Purchase Life Insurance for a Baby

If the primary reason for purchasing baby life insurance is cash accumulation through the cash value component of the whole life policy, other alternatives should be considered, such as:

Mutual funds: Though mutual funds and other investments such as stocks and bonds are riskier than the guaranteed interest rate whole life insurance policies provide, history shows that growth-oriented mutual funds held over time will grow at a much faster rate than whole life insurance policies do. Consider the growth of mutual funds shown in the chart below:

Average Mutual Fund Returns

Category

2021 Return

3-Year

5-Year

10-Year

15-Year

U.S. Large-Cap Stock

26.07%

23.83%

16.57%

14.96%

9.73%

U.S. Mid-Cap Stock

23.40%

20.74%

12.67%

13.12%

8.73%

U.S. Small-Cap Stock

24.19%

19.73%

11.22%

12.74%

8.50%

International Large-Cap Stock

9.72%

13.56%

9.38%

7.85%

3.75%

Long-Term Bond

-1.19%

10.37%

7.22%

6.02%

6.75%

Intermediate-Term Bond

-1.48%

4.81%

3.47%

2.95%

3.98%

Short-Term Bond

0.05%

3.02%

2.37%

1.96%

2.59%

Mean

11.54%

13.72%

8.99%

8.51%

6.29%

(Dec. 31, 2021, trailing returns according to Morningstar)

Most life insurance companies guarantee an interest rate of 2% to 5%, which is substantially lower than the 14.96% average rate of return of a U.S. Large-Cap Stock mutual fund shown above. 

Section 529 plans: These are plans that allow a parent to contribute money into a special account that will pay for the future educational expenses of the baby. While contributions to 529 plans aren’t tax-deductible, the growth inside of the account is tax-deferred. In addition, if the withdrawals from the account are used on qualified educational expenses, they too are not taxable. 

Custodial accounts: A custodial account is an account the parent sets up strictly for the financial benefit of the baby. Any money deposited into the account must be used for the child’s well-being, and ownership of the account will transfer to the child when they reach the age of majority (18 or 21). Any investment income generated by the assets in the account is considered the child’s income and will be taxed at the child’s rate when they reach 18. 

How to Find the Best Whole Life Insurance Policy for a Baby

It’s not difficult to purchase whole life insurance policies for babies or young children. Just about all major life insurance companies offer this type of coverage, including prominent names like New York Life, Prudential, MetLife, Northwestern Mutual Life, and Mutual of Omaha. There are also some lesser-known companies with excellent financial ratings that offer this coverage, sometimes for much lower premiums than the household names. 

Which company offers the best policy is open to debate. There are numerous websites that evaluate different companies and their policies for babies, and the verdict as to which company offers superior coverage is far from unanimous.  Almost all companies that sell insurance policies for babies will let you purchase that coverage online. 

Since there are so many companies to choose from, many people use the services of an independent life insurance agent to help them find the best policy for their families. Independent agents represent many different insurance companies, unlike “captive” or “career” agents that are contracted with only one insurance company. Because they can do the comparison shopping for you, independent life insurance agents can save you time and money, and they can help you decide how much life insurance you need

Don’t Buy On Price Alone

Though life insurance can be seen as a commodity that can be evaluated solely on price, there are other important factors when you purchase a policy. 

For example, what are the financial ratings of the company selling the policy? If your child is going to be insured by the company you selected for what could be decades, it’s essential for you to do your homework and find out about the financial condition of the life insurance company.

Companies like A. M. Best, Moody’s, and Standard & Poor’s rate insurance companies’ financial statuses and their ability to pay claims in the future. Take time and examine these ratings, and how long it takes to get a life insurance payout, before making a buying decision and completing an application.

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