Life insurance for children: Benefits to purchasing coverage for kids
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Life insurance is part of a key financial protection strategy for many families. It can help navigate the death of a loved one, especially by reducing the financial stress that comes with the loss of a wage-earning parent. Life insurance policies aren't restricted to adults, however. Many families may also buy life insurance policies for their children. Does it make sense to buy life insurance for your children? This article can help by telling you:
What life insurance for children is, and how it works
Pros and cons of buying children's coverage
Why investing for their future may make more sense
What is life insurance for kids?
Life insurance for children functions much like life insurance for adults: A life insurance policy is a contract between an individual and an insurance company, and the policy pays a financial benefit if the insured person passes away.
Children's life insurance policies provide the same type of coverage, paying out a death benefit should the child pass away during the covered time period. The money is paid to the policy's beneficiaries, who are typically the parents, grandparents, or siblings.
There is a key difference between policies for adults and children: the policyholder (or policy owner) and the person insured in an adult policy are typically the same, while a parent typically owns the policy in a children's policy, but the child is named as the insured.
Beyond that difference, it's also important to note that the details of each policy vary. Some types of policies— such as whole life insurance and other permanent life insurance policies — provide lifelong coverage and build cash value.1,2,3 Other types of policies don’t build cash value and only protect for a limited period of time, typically between 10 and 30 years (this is known as term life).4
How life insurance for children works
There are some key points to understand before you consider buying life insurance for a child:
1. The maximum age can vary
Many policies are available for children aged 17 or younger, but some life insurance companies have a lower age cap of 13-14. Once the child turns 18, only standard life insurance policies for adults will be available.
2. Most policies are whole life policies
Whole life insurance provides lifelong coverage, so long as premiums, the amount of money you pay the insurance company for the policy, continue to be paid. Also, premiums are guaranteed level in a whole life insurance policy, which means they cannot be raised later on due to health or other issues.
That being said, some insurance providers do offer term life insurance for children. But it’s important to note that term life insurance policies only provide a death benefit. There is no cash value component, and these policies won’t provide lifetime coverage.5
If you’re considering term life coverage, it’s a good idea to work with your financial professional to make sure you understand the tradeoffs. They can also get quotes for both term and whole life insurance for children to help you compare policies.
3. Whole life policies have a “cash value” component
Children’s whole life insurance policies typically have a cash value component that grows over time, in addition to a guaranteed death benefit for the child’s entire life: A portion of monthly premiums can grow tax-deferred — which means funds aren't taxed until withdrawn.6 These funds are an asset that can eventually be accessed via policy loans and in other ways.7 Some parents consider these cash value life insurance policies a long-term asset with the added advantage of providing death benefit coverage.
4. Medical exams often aren’t necessary
Adults are typically required to get a medical exam before purchasing life insurance. For children, this requirement is usually waived.8
5. The death benefit is typically lower than adult policies
The death benefit for children’s life insurance policies is generally on the low side, often in the $5,000-$50,000 range.9 This is because children don’t typically have income or support their families financially. Adult policies, on the other hand, usually offer higher death benefits because they are intended to help replace some of the lost income that the policyholder would have otherwise provided.
6. Children’s life insurance policies can be transferred
Once your child turns 18, you can transfer ownership of the policy to them. Some policies convert automatically at a certain age (18 or 21 is common), while others have the option to convert.10
7. You’ll need the child’s personal information to apply
Insurance companies typically need the child's full legal name, date of birth, and social security number. You may also be required to answer some medical questions, even though a medical exam is usually not required.
What are the pros and cons of children’s life insurance?
Advantages | Disadvantages |
|---|---|
Whole life insurance locks in low premiums for life as long as premiums are paid | Coverage amounts can be low, as policyholder needs are typically low |
Whole life insurance can accumulate cash value for the future | Whole life returns can be relatively low, so cash value may accumulate slowly |
Term life and whole life policies provide death benefits in the event of the child’s untimely passing | Paying consistent premiums may be a financial burden for families on tight budgets |
Financial benefits can help cover medical expenses and funeral costs, reducing financial stress at a difficult time | Children are much less likely to pass away compared to adults, so life insurance may not be necessary |
Death benefits can also be used to help cover expenses while parents take time off work to grieve | While whole life policies provide life-long coverage, benefit amounts may be insufficient to cover the child later in life |
It’s typically easy for children to be approved | There may be a limited risk rating; some companies, for example, only accept non-smoker for children |
Life insurance policies may be a helpful gift idea for parents of young children |
Children’s life insurance vs investing
For many parents, the main reason for buying life insurance for their children is to help reduce financial stress in case something unthinkable happens. Life insurance is a practical choice for providing this financial protection, but it's not the only option.
A viable alternative for many families is to set up a savings account or investment account and then contribute money to it each month. This money could then be used in the unlikely event of your child's death — or transferred to the child once they reach adulthood.
This can be a compelling option, with one or two caveats: You must be consistent with monthly investing. With a life insurance policy, you're required to make the monthly premiums. To invest, you must build the habit yourself. It's best to set up automatic transfers each month to keep your savings growing. It will also take a long time to save an amount equal to what a policy’s death benefit can provide from day one, and it’s important to note that investments are taxable but death benefits are not.
To illustrate, let’s look at an example. Say you’re considering a life insurance policy for your newborn baby. The policy has a $20,000 death benefit and a $12/month premium.
If you instead put that $12/month into an investment account earning 7% per year, it would be worth around $2,000 by the time your child turns 10, and around $5,000 by the time they turn 18.
The life insurance policy would have a higher benefit ($20,000), but that payout only happens if your child passes away. With a whole life insurance policy, there may also be cash value, but it may not equal what you save in an investment account.11 Also, a savings or investment account gives you more flexibility and autonomy, but again, you have to commit to regular contributions.
Estimating the costs of life insurance for children
The most accurate way to determine the cost of a life insurance policy is to request a quote, which can often be done online. This allows you to receive a customized quote based on your child’s age, location, coverage amount, and other key factors.
With that said, life insurance premiums for children are typically quite affordable. For babies, monthly premiums for whole life can be as low as $3-$27, depending on type of policy and coverage amounts.12 Term life insurance is generally cheaper than whole life coverage, and costs are somewhat higher for older children, but pricing also varies depending on the life insurance company.
Should I buy life insurance for my kids?
Determining the best course of action for your family depends on a variety of factors. So, consider the pros and cons and compare the cost of children’s life insurance to alternative investments. You should also take your personal financial situation into account. If you have sufficient savings, child life insurance policies may be less necessary, since you could likely pay for any expenses out of pocket.
Situations where a child life insurance policy can make sense include:
You want the reassurance of knowing that your family will have a financial cushion to help you get through a potentially stressful time.
You don't have substantial cash savings to cover final expenses like a funeral.
You want to lock in low premiums for a permanent, lifetime children’s policy.
You want financial protection for your family as well as a cash value component that your child can use as an adult.
Situations in which child life insurance may not be the right choice:
You have substantial savings for emergencies.
You are already investing on behalf of your children in tax-efficient ways.
Guardian can help
If you’re considering life insurance for a child and other ways to protect family finances, a financial professional can help you better understand your options and make the right decision for you. This includes what types of coverage may benefit you most, and how much coverage you may want to consider.
If you don’t have someone to speak to, ask your friends for a recommendation. Or, click below to find a Guardian Financial Professional in your area.
They'll provide answers and insurance quotes and can also tell you about Guardian child coverage riders that may let you cover a child under your own life insurance policy. And remember: The younger a child is when covered, the less the policy will cost. So why not do it today?