Henry Okafor
The COVID-19 outbreak has helped many realize how important life insurance is. According to a recent poll by Life Happens, a non-profit organization that provides information on insurance and is supported by business, it has been one of the most popular subjects of conversation at dinner tables. Additionally, 25% of those polled stated that they purchased life insurance as a result of the coronavirus.
Family members who rely on you financially may benefit from a safety net provided by life insurance. Faisa Stafford, CEO and President of Life Happens, claims that the epidemic inspired her to get life insurance plans for her two teenage children. Naturally, the ones who now rely on Stafford for support are her daughters. Why then would they require insurance coverage?
Stafford says she wanted to protect her daughters’ insurability, which is one of the primary reasons parents buy life insurance policies for their children.
“When I started hearing of COVID-19’s possible long-term effects and the risks to all age groups, I quickly hopped on the phone with my financial professional to ask about getting my two teens insured with whole life insurance policies that would protect their future insurability,” she says. “I didn’t want them worrying about not being insurable because of some potential health issues they may develop later in life.”
There can be other reasons, too, for insuring children. However, it certainly doesn’t make sense for all families to spend money on this sort of coverage. Before you decide whether it’s right for your family, here’s what to know about the pros and cons of life insurance for kids.
What Is Life Insurance for a Child?
Like a life insurance policy for an adult, a life insurance policy for a child is a contract with an insurance company. Premiums are paid (typically monthly or annually) in return for the promise that the insurance company will pay a death benefit if the child dies.
A child’s life insurance policy is a contract with the insurance company, just like an adult’s life insurance policy is. In exchange for the assurance that the insurance provider would provide a death benefit in the event that the kid passes away, premiums are normally paid monthly or annually.
The policyholder is often the insured party—the individual who is covered by the policy—with an insurance policy for an adult. When a kid is covered under a policy, the policyholder is often a parent, grandparent, or legal guardian. The beneficiary who receives a payout in the event that the covered kid passes away might also be the policyholder.
Children’s life insurance plans are frequently entire life insurance plans, which implies that as long as premiums are paid, they will offer everlasting protection. The majority of premiums are guaranteed, so they won’t rise over time. In addition, a portion of the premium goes toward creating financial value, which may be used at any time while the kid is still living.
A term insurance life policy, which offers protection for just a certain number of years, cannot be purchased for a kid. However, if you get term life insurance for yourself, you may be able to add a rider to cover all of your children up to a particular age, at which point the coverage will probably be changed to permanent plans for them at an additional cost.
What to Know About Buying Life Insurance on Children
When compared to purchasing a coverage for an adult, purchasing life insurance for a child is comparatively quick and simple. Although an application must be completed, your kid won’t need to undergo the life insurance medical examination that companies frequently demand of adults.
“The process was simpler and quicker than installing the latest meme for my Zoom background,” Stafford says. “I filled out and signed one electronic form and simply waited while my teens’ underwriting was all done online.”
Usually, if your child is 17 years old or younger, you can get life insurance for them. The cap, though, may be lower. For the Gerber Life Grow-Up Plan, the age restriction is 14. But as long as the payments are paid, the coverage is maintained throughout the child’s life.
Henry Hoang, the founder of Bright Wealth Advisors and Bright Life Insurance in California, explains that since you are the policy’s owner, you are free to give it to your child at any time. Once their children are adults, it’s typical for parents to transfer their insurance policies to them and allow them to take over premium payments. The child really becomes the owner of the policy with Gerber Life at age 21.
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
According to Hoang, the cost of the coverage will decrease the younger your child is when you get it. A whole life insurance policy will ensure the low rate you lock in at the time of purchase throughout the duration of the policy.
The level of coverage you purchase will also have an impact on how much you spend. Additionally, it could be impacted by the kind of payment arrangement you decide on. According to Hoang, you could have the choice to buy a coverage that is paying until the child is 65 or 100 years old. The premium will be less expensive the longer the payment schedule is spread out.
On the other side, the insurer could give the choice to pay off a policy sooner rather than later, rather than throughout the course of the child’s life. For its children’s entire life insurance coverage, American Family Insurance, for instance, offers 10-year and 20-year payment choices. If you wish to transfer a paid-off insurance to your child, this is a choice worth thinking about even if the premiums would be greater the shorter the payment duration.
The example quotes that Hoang has supplied below show that a youngster will pay substantially less for a complete life insurance policy than an adult will. A life insurance firm with a AAA rating provided the sample quotes. Rates are for a guy as shown.
Monthly Cost of $100,000 of Whole Life Insurance Payable to Age 65, By Age Purchased
| Age | Monthly cost of $100,000 whole life |
|---|---|
| 0 | $44 |
| 15 | $71 |
| 30 | $127 |
Monthly Cost of $100,000 of Whole Life Insurance Payable to Age 100, By Age Purchased
| Age | Monthly cost of $100,000 whole life |
|---|---|
| 0 | $38 |
| 15 | $59 |
| 30 | $96 |
However, Hoang warns against choosing an insurance only on the basis of the premium. You should look at internal costs and a policy illustration that displays the projected growth of the policy’s cash value over time using a fixed rate of return.
The optimal course of action might not be the cheapest insurance. Is it going to provide you with greater worth in the future? you should inquire, advises Hoang. Whether the premium for the coverage is worthwhile will depend on how the policy performs.
Pros of Buying Life Insurance for a Child
It guarantees insurability. The biggest selling point of a life insurance policy for a child is that you’re guaranteeing that your child will have coverage even if he or she develops a health condition later in life. Plus, insurers often offer riders (at an additional cost) that will allow you or your child to purchase more coverage in the future without having to go through a medical exam or proving insurability, Hoang says.
By buying life insurance for a child, you’re not just locking in insurability if your child has a change in health. According to Steve Meldrum, an insurance expert at Swell Private Wealth, by providing your child with insurance, you’re also guaranteeing that your child will be covered if they develop a risky hobby. A 23-year-old customer of Meldrum, for instance, has experienced difficulty obtaining life insurance due to his interest of scuba diving, which insurance companies view as a danger to insure.
It allows you to lock in a low rate. When a child is a newborn, life insurance rates are at their lowest ever. With each year of life, rates will rise. Of course, over a longer length of time, you or your child will pay premiums. But because to the extremely low rates for children, the total amount paid over time may still be cheaper. According to the rate example provided by Hoang, the $44.46 monthly premium for $100,000 of coverage at age 0 will total $20,000 less over 65 years than the $126.76 monthly premium for a 30-year-old paid over 35 years.
It provides funds for funeral expenses. Funeral fees are not a compelling argument to get life insurance on a child because it is unlikely that they would pass away. However, if that occurs, a life insurance policy will offer money to assist pay for funeral expenditures. Additionally, it could make it possible for the family to afford to take time off of work to grieve the death of a child.
You can probably add a rider to your own life insurance policy to cover your child for less than what you’d pay for a complete life insurance policy on the child if you’re primarily interested in life insurance for the child to pay funeral expenses.
It has cash value. A whole life insurance policy’s premiums include a part that goes toward creating cash value. Because the cost of insurance is low and there is longer time for the cash value to grow, when you purchase a policy for a child, a larger amount of the premium will go toward the cash value.
“There’s some value in that extra time you get to accumulate cash,” Hoang says. And the cash value can be accessed for any reason. But note that withdrawing cash from the policy could trigger a tax bill and will reduce the death benefit.
Cons of Buying Life Insurance for a Child
It offers a low rate of return.
Despite the fact that whole life insurance plans increase cash value, they do so slowly. Accordingly, Hoang advises against using life insurance for a kid in place of a 529 college savings plan.
It typically takes 15 years to break even if you purchase a coverage for a baby before the cash value is equivalent to the premiums paid. Hoang notes that the money invested would double in 10 years if you invested in a 529 college savings plan and had a 7% return (the typical stock market return). Compared to purchasing a life insurance policy, investing in a 529 plan can yield substantially larger returns.
It’s a long-term commitment. When you buy a whole life insurance policy, you should expect to be paying premiums for decades. “If cash flow becomes tight, it’s not going to be worthwhile if you have to cancel,” Hoang says.
If the insurance has accumulated enough cash value, you might be able to use it to pay premiums for a while. But if your child uses it later on in life, it will be worth less financially.
Coverage limits tend to be low. Many insurers cap the amount of protection for kid’s life insurance policy at $50,000 or $75,000 Once your child is an adult and has a family to support, that coverage won’t be adequate. They’ll probably need to purchase life insurance as adults in order to have enough protection.
It’s a financial trade-off. When you buy life insurance on a child, you’re giving up money that could be used on other things to support the well-being of your child, Meldrum says. Because it is unlikely that your child will die at a young age, your money might be better spent elsewhere.
When Life Insurance for Kids Does—And Doesn’t—Make Sense
Make sure you have adequate coverage before purchasing life insurance for a child. Priority is given to safeguarding the financial security of loved ones. According to Hoang, in order to insure a kid, insurers typically demand that parents have their own life insurance policies with at least the same level of coverage they want to purchase for a child.
Before purchasing life insurance for a child, be sure you’ve taken care of other financial needs. Priorities should be given to saving for retirement, paying off high-interest debt, and building an emergency reserve.
“Take care of yourself before you take care of your kids,” Meldrum says. Then, if you have room in your budget, you can consider life insurance for your kids.
Life insurance for a kid isn’t always a smart idea, but for certain families, Meldrum adds, it can be a sensible option. For instance, wealthy parents can be drawn to the prospect of transferring wealth to their offspring via a life insurance policy. They could also enjoy the tax-favored increase on the policy’s cash value part.
Additionally, Meldrum adds, it can make sense to cover your child if hereditary medical issues like diabetes run in your family. Then, if your child subsequently develops a medical problem, you won’t have to worry about whether they’ll be refused coverage.
You may determine if life insurance for your children is a wise investment for your family and your entire financial condition by consulting with a financial counselor. Consider dealing with an independent insurance broker that represents several insurance providers and can assist you in locating the greatest coverage at the most affordable price.
