The covid-19 pandemic has been a wake-up call for many about the need for life insurance. It’s been one of the top topics of discussion at the tables, according to a recent survey by Life Happens, an industry-funded nonprofit organization that provides insurance information. and a quarter of those surveyed said they bought life insurance because of the coronavirus.
Life insurance can provide a safety net for loved ones who depend on you financially. But Life Happens CEO and President Faisa Stafford says the pandemic prompted her to buy life insurance policies for her two teenage daughters. of course, her daughters are the ones who now depend on stafford for her support. so why would they need insurance policies?
Stafford says he wanted to protect his daughters’ insurability, which is one of the main reasons parents buy life insurance policies for their children.
“When I started hearing about the possible long-term effects of covid-19 and the risks for all age groups, I quickly phoned my financial professional to ask how to insure my two teenagers with home insurance policies. whole life than protecting your future insurability,” he says. “I didn’t want them to worry about not being insurable because of some potential health problems they might develop later in life.”
There may also be other reasons to insure children. however, it certainly doesn’t make sense for all families to spend money on this type of coverage. Before you decide if it’s right for your family, here’s what you need to know about the pros and cons of child life insurance.
what is life insurance for a child?
Like an adult life insurance policy, a child life insurance policy is a contract with an insurance company. premiums are paid (usually monthly or annually) in exchange for a promise that the insurance company will pay a death benefit if the child dies.
With an adult insurance policy, the policyholder is usually the insured person, the one covered by the policy. With a policy for a child, the child is insured, but the policyholder is a parent, grandparent, or legal guardian. the policyholder may also be the beneficiary who receives a payment if the insured child dies.
Children’s life insurance policies are generally whole life insurance policies, meaning they will provide coverage for life as long as premiums are paid. premiums tend to be guaranteed, so they won’t increase over time. In addition, a portion of the premium goes toward building cash value, which can be accessed while the child is alive for any reason.
You can’t buy a term life insurance policy on a child, which would provide coverage for only a certain number of years. however, if you purchase a term life insurance policy for yourself, you may be able to add a rider to cover all of your children until they reach a certain age, at which point the coverage can likely be converted to permanent policies for them at an additional cost price.
what you need to know about buying child life insurance
Buying life insurance for a child is relatively quick and easy, especially when compared to buying a policy for an adult. You’ll need to fill out an application, but your child won’t have to undergo a life insurance medical exam, which insurers often require for adults.
“The process was simpler and faster than installing the latest meme for my zoom background,” says stafford. “I filled out and signed an electronic form and just waited while my teen’s subscription went online.”
You can generally buy life insurance for a child age 17 or younger. however, the limit may be lower. For example, the age limit is 14 years for the Gerber Life growth plan. however, coverage remains intact for the life of the child, as long as premiums are paid.
As the owner of the child’s policy, you can transfer it to your child at any time, says Henry Hoang, founder of Bright Heritage Advisors and Bright Life Insurance in California. it is common for parents to transfer policies to their children once they are adults and let them take care of the premium payments. In fact, with Gerber life policies, the child becomes the owner at age 21.
related: tips for first time life insurance buyers
the cost of insuring a child
The younger your child is when you buy a policy, the cheaper it will be, Hoang says. With a whole life policy, the low rate he set at the time of purchase will be guaranteed for the life of the policy.
The amount you pay will also be affected by the amount of coverage you purchase. and may be affected by the type of payment schedule you choose. For example, you may have the option of buying a policy that pays until the child is 65 or 100, Hoang says. the longer you extend the payment schedule, the lower the premium.
On the other hand, the insurer might offer the option of paying out a policy over a certain number of years instead of over the child’s lifetime. For example, American Family Insurance has 10-year and 20-year payment options for your children’s whole life insurance policy. The shorter the payment period, the higher the premium, but it’s an option worth considering if you want to pass on a policy you’ve already paid for to your child.
As you can see from the sample rates provided by hoang below, the premiums for a whole life policy are significantly lower for a child than for an adult. Sample rates are from an AAA rated life insurance company. rates shown are for a male.
monthly cost of $100,000 of whole life insurance payable up to age 65, by contracted age
monthly cost of $100,000 of whole life insurance payable up to 100 years old, by contracted age
Keep in mind, however, that you shouldn’t buy a policy based solely on premium, says hoang. you’ll want to see the internal rates and an illustration of the policy showing how much the policy’s cash value will grow over time based on a guaranteed rate of return.
the cheapest policy may not be the best approach. hoang says you should ask, “will it give you more value in the future?” the performance of the policy will determine if the policy premium is worth it.
pros of buying life insurance for a child
guarantees insurability. the biggest selling point of a life insurance policy for a child is that you are guaranteeing that your child will be covered even if they develop a health condition later in life . In addition, insurers often offer riders (at additional cost) that will allow you or your child to purchase more coverage in the future without having to undergo a medical exam or prove insurability, Hoang says.
When you buy life insurance for a child, you’re not just ensuring insurability if your child has a change in health. He also makes sure his son is covered if he takes up a dangerous hobby, says Steve Meldrum, an insurance specialist with vast private wealth. For example, Meldrum has a 23-year-old client who has had trouble getting life insurance because he is a scuba diver, a hobby insurers consider a risk to insure.
Allows you to lock in a low rate. You’ll never get a lower rate on life insurance than when a child is newborn. rates will increase with each year of life. Of course, you or your child will be paying premiums over a longer period of time. but the amount paid over time may still be less due to super low rates for a child. Using the rate example provided by Hoang, the $44.46 monthly premium for $100,000 of coverage at 0 years will be $20,000 less over 65 years than the $126.76 monthly premium for a 30-year-old male paid over 35 years. .
Provides funds for funeral expenses. The chances of a child dying are low, so funeral costs are not a good reason to buy life insurance for a child. But if that happens, a life insurance policy will provide funds to help cover the cost of final expenses. it could also allow the family to take a break from work to grieve the loss of a child.
If you’re primarily interested in life insurance for a child that covers funeral costs, you may be able to add a rider to your own life insurance policy to cover your child for less than you’d pay for a whole life insurance policy on the child.
It
has cash value. A portion of the premiums paid for a whole life insurance policy goes toward building cash value. When you buy a policy for a child, more of the premium will go toward the cash value because the cost of insurance is low and there is more time for the cash value to build.
“There’s some value in that extra time you have to accumulate cash,” Hoang says. and the cash value can be accessed for any reason. but keep in mind that withdrawing cash from the policy could result in a tax bill and will reduce the death benefit.
disadvantages of buying life insurance for a child
Offers a low rate of return. Although whole life insurance policies build cash value, they do so at a low rate of return. therefore, life insurance for a child should not be a substitute for a 529 college savings plan, says hoang.
If you buy a policy for a newborn, it typically takes 15 years before the cash value equals the premiums paid, that is, to break even. However, if you invested in a 529 college savings plan and returned 7% (the average stock market return), the amount you invested would double in 10 years, Hoang says. You can expect to see much higher returns by investing in a 529 plan than you would with a life insurance policy.
It’s a long-term commitment. When you buy a whole life insurance policy, you can expect to pay premiums for decades. “If cash flow becomes tight, it won’t be worth it if you have to cancel,” Hoang says.
You may be able to use the cash value to cover premium payments over time if the policy has built up enough cash value. but then there will be less cash value for her child if she needs it later in life.
Coverage limits tend to be low. Several insurers limit the amount of coverage on children’s life insurance policies to $50,000 or $75,000. that won’t be enough coverage once your child is an adult and has a family to support. they will likely need to purchase life insurance as adults to have enough coverage.
It’s financial compensation. When you buy life insurance for a child, you’re giving up money that could be used for other things to support your child’s well-being, Meldrum says. Since her son is unlikely to die at a young age, her money might be better spent elsewhere.
when life insurance for children makes and doesn’t make sense
Before you buy life insurance for a child, make sure you have enough coverage for yourself. protecting the financial well-being of loved ones takes priority. In fact, insurers generally require parents to have their own life insurance policies with at least as much coverage as they wish to purchase for a child as a prerequisite to insuring a child, Hoang says.
You should also make sure you’ve addressed other financial priorities before purchasing life insurance for a child. building an emergency fund, saving for retirement, and paying off high-interest debt should take precedence.
“Take care of yourself before you take care of your children,” says meldrum. So if you have room in your budget, you may want to consider life insurance for your children.
Although life insurance for a child doesn’t always make sense, it can be a good solution for some families, Meldrum says. For example, high-income parents may find the ability to transfer wealth to their children through a life insurance policy attractive. or they may like the tax-advantaged growth in the cash value portion of the policy.
Also, if your family has a history of genetic medical conditions, such as diabetes, it might make sense to insure your child, Meldrum says. then you won’t have to worry that your child will be denied coverage in the future if he develops a medical condition.
Working with a financial planner can help you decide if life insurance for your children is a good option for your family and your overall financial situation. Also consider working with an independent insurance broker who works with multiple insurance companies and can help you find the best policy at the best price.
