What Is Children’s Life Insurance?
Life insurance for children is usually a whole life insurance policy. A parent, grandparent or legal guardian can buy life insurance for a child. These policies are marketed as a way to lock in affordable premiums and protect your child’s future insurability.
Understanding the Basics of Children’s Life Insurance
Whole life policies build a cash value, or a savings account that grows slowly over time. Cash value grows at a rate specified in the policy.
Whole life policies also guarantee lifelong coverage so long as premiums are paid.
Most of the largest life insurance companies offer whole life policies for kids.
One of the most well-known child life insurance policies is the Gerber Grow-Up Plan from the Gerber Life Insurance Company.
The primary purpose of life insurance is to replace income or cover debts if someone dies.
But life insurance for kids has different selling points.
- Acts as an investment or savings vehicle for future life expenses, such as college tuition.
- Locks in affordable life insurance premiums at a young age.
- Protects your child’s future insurability.
- Covers funeral costs in case a child dies.
Whether these selling points actually pay off depends on who you ask. Some experts staunchly oppose these policies, while others argue that it may make financial sense in some situations.
How Life Insurance for Kids Works
A parent, grandparent or legal guardian can purchase a child’s life insurance policy and be named as the policyholder.
You can transfer ownership of the policy to a child once he or she reaches adulthood. The child then takes over premium payments.
To purchase life insurance for a child, you will need to fill out an application and some paperwork.
Your child will not need to undergo medical underwriting, which insurance companies often require for adults.
However, if your child already has a medical condition, it may be difficult to obtain child life insurance. Or, you may have to pay high premiums for the coverage.
Typically, the younger a child is when you buy a policy, the cheaper coverage will be. How much you pay for the policy depends on how much coverage you buy.
Keep in mind that insurance companies often require parents to have their own life insurance policies with at least as much coverage as they want to purchase for a child.
Pros and Cons of Life Insurance for Children
Life insurance for children can be a controversial subject. Some people think it’s a good investment, while others see it as a waste of money.
- Guarantees Insurability
- You can guarantee that your child will have life insurance coverage even if he or she develops a health condition later in life. Your child may be able to buy additional coverage in the future without undergoing a medical exam or proving insurability.
- Builds Cash Value
- Part of a whole life policy’s premiums go toward building cash value. The policy owner can borrow against this cash value or surrender the policy for money. Cash value growth is tax-deferred, so no income tax is owed until you withdraw money or surrender the policy. The cash can be used for anything, such as college expenses.
- Covers Funeral Expenses
- A life insurance policy provides money to help cover final expenses. However, statistically, the odds of a child dying are very low. You may also be able to add a rider to your own life insurance policy that covers your child for less than the cost of a whole life insurance policy on the child.
Purchasing children’s life insurance may not make sense for your family.
Consider speaking with a financial planner to see if this type of policy is a good fit for your overall financial situation.
- Cash Value Has a Low Rate of Return
- A whole life insurance policy’s rate of return is low — about as much as a certificate of deposit you’d buy at a bank. According to Forbes, if you purchase a policy for a newborn, it may take 15 years to break even — or for the cash value to equal premiums paid. You are likely to see much higher returns by investing your money elsewhere.
- Low Coverage Limits
- Life insurance for children often has lower coverage amounts than policies for adults. Typically, amounts range from $25,000 to $75,000. If your child wants to carry the policy into adulthood, he or she may only be able to get a limited amount added to it. That won’t be enough coverage once your child is an adult with a family of their own.
- Long-Term Commitment
- A whole life insurance policy requires decades of premium payments. If you miss a few payments, the policy can lapse, and you will lose any money you’ve put in.
Alternatives to Children’s Life Insurance
If you’re interested in saving for your child’s future, there may be better options than purchasing children’s life insurance.
There may also be more affordable ways to insure your child’s life in case he or she dies.
- Purchase a Child Rider
- Adding a child rider to your term life insurance policy provides a death benefit if one of your children passes away. A single child rider can usually insure all your children at an affordable rate. According to some experts, this type of rider may cost between $50 to $60 a year. It may be cheaper than buying a whole life insurance policy on the child.
- Open a 529 Plan
- If you’re considering life insurance because you want to save money for your child’s college expenses, you may want to open a 529 plan instead. These accounts are made exclusively for higher education costs and come with tax benefits. Education Savings Accounts, or ESAs, are another tax-advantaged way to save for your child's education.
- Open a Custodial Account
- In most cases, a custodial account is a brokerage or savings account that an adult controls for a child until he or she turns 18 or 21. Once the child is of age, he or she assumes ownership of the account. However, these accounts have strict rules, and money in the account may count against your child’s financial aid.
4 Cited Research Articles
- Huddleston, C. (2020, October 19). Pros And Cons Of Life Insurance For Children. Retrieved from https://www.forbes.com/advisor/life-insurance/life-insurance-for-children/
- Huntley, C. (2020, August 7). Life Insurance for Children: 3 Points Parents Should Keep in Mind. Retrieved from https://money.com/life-insurance-for-children-3-points-parents-should-keep-in-mind/
- DaveRamsey.com. (2019, October 21). Do I Need Life Insurance for My Child? Retrieved from https://www.daveramsey.com/blog/life-insurance-for-children
- Nataren, E. (2017, February 16). Juvenile Life Insurance: The Whys and Hows. Retrieved from https://lifehappens.org/blog/juvenile-life-insurance-the-whys-and-hows/