Should I buy life insurance for my kids?

Life insurance is most commonly purchased for adults. Here’s why you might want to consider buying it for children.

Life insurance is a key part of a financial protection strategy for many families. It can help navigate the death of a loved one, especially by helping to reduce the financial stress that comes with the loss of a wage-earning parent. But many families also choose to buy policies for their children. Does it make sense to buy life insurance for kids? This article can help you decide by telling you about:

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 a life insurance policy for an adult. 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 paid out goes to the beneficiary, typically the parents, grandparents, or a sibling.

One difference: In an adult policy, the policyholder (or policy owner) and the person insured are typically the same. In a children's policy, a parent typically owns the policy, but the child is the named insured. Beyond that difference, it's also important to note that the details of each policy vary. Some provide lifelong coverage and build cash value (i.e., a permanent life insurance policy, such as whole life insurance)^1,2, while others 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).

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 plans 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.

3. Whole life policies have a “cash value” component

As a secondary benefit, children’s whole life insurance policies typically have a cash value component that grows over time. A portion of monthly premiums can grow as tax-deferred cash value over time. These funds are an asset that can eventually be utilized via policy loans and in other ways.³ 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.

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. This is because children don’t typically have income or support their families financially. Adult policies, on the other hand, have 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 choose to transfer ownership of the plan over to them. Some policies convert automatically at a certain age (18 or 21 is common), while others have the option to convert.

7. You’ll need the child’s personal information to apply

Insurance companies will 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.

What are the pros and cons of children’s life insurance?

If you're wondering if you should buy life insurance for kids — this list of advantages and disadvantages will help you decide.

Pros

Provides a death benefit in the unlikely event of a child’s passing.
This financial benefit can help cover funeral and medical expenses, plus help reduce financial stress on your family.
The death benefit can also help cover expenses while parents take time off to grieve.
Life insurance is typically easy for children to get approved for.
Some policies have a cash value component that grows tax-deferred.⁴
Buying a policy early in life can lock in low premiums.
Life insurance policies can even be a unique gift idea for parents of young children.

Cons

Children are typically less likely to pass away compared to adults, so life insurance may not be necessary.
The death benefits on children’s life insurance policies are typically smaller than adult policies; they may be insufficient to cover the child later in life.
While whole life policies have a cash value component that can grow, it’s typically not the most advantageous investment option.
Premiums must always be paid to maintain coverage.

Children’s life insurance vs investing

For many parents, the main reason to buy life insurance for their children is to help reduce financial stress in case the unthinkable happens. Life insurance is an effective 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, 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 need to be consistent with investing each month. With a life insurance policy, you’re required to make the monthly premiums. For investing, you must build the habit yourself. It’s best to set up automatic transfers each month to keep your savings growing. Also, it will take a long time to save an amount equal to what a death benefit can provide on day one.

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 would also be funds in the cash value account, but it may not equal what you save in an investment account.⁵ 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 typically be done online. This allows you to receive a customized quote based on your child’s age, location, coverage amount, etc.

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-$30, depending on type of policy and coverage amounts.⁶Term 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.