It’s natural for you to want to protect your children so that they grow up to become happy, successful adults. Life insurance for your kids may not seem like something you would consider. However, acting now can guarantee you low rates, while a policy can be an alternative investment for your children.
Discover the benefits and potential shortcomings of a life insurance plan for your child so that you can make the best decision.
What is Child Life Insurance?
A child life insurance is a policy that a parent, grandparent, or guardian purchases in order to cover the life of a minor. Life insurance plans for children are created to become lifetime policies where the minor has coverage for as long as premium payments are made.
The amount of coverage is low compared to other life insurance types, usually between $50,000 and $75,000, but premiums remain constant throughout the policy’s life.
How Much Does Life Insurance for Your Child Cost?
Currently, the average monthly premium you pay on a $100,000 whole life insurance payable to age 65 is around $44 for infants. The same plan for a 15-year-old costs $71 per month.
Coverage amounts vary, and choosing a lower dollar amount reduces your premium. For example, parents who opt for a $25,000 policy for a newborn can pay an annual premium of around $150. Depending on your plan, premiums can be paid monthly or annually.
Pros and Cons of Life Insurance for Children
Weighing the pros and cons of a life insurance policy for your child can help you decide whether it’s the right choice for you.
The pros of life insurance for your kids
Your child’s life insurance policy allows you to withdraw cash from its account or borrow against it if the need arises. These funds can cover your child’s college tuition or go toward the purchase of their first home when they reach adulthood. The policy’s value grows without paying taxes on gains until you choose to withdraw from it.
A life insurance policy for your children can guarantee they are insurable in the future. They also will not have to complete a medical exam if they choose to buy additional coverage later. This is particularly beneficial for children who develop chronic medical conditions.
It is also a way for people that pursue high-risk careers, such as going into the military or becoming pilots, to secure affordable insurance. Those who follow riskier careers or develop health issues generally have to pay higher premiums, and a life insurance policy for your child can bypass this.
The cons of a child life insurance policy
If you choose a cash value life insurance plan, the account’s value will take many years to grow. This is because cash value plans are insurance policies where part of the premium goes toward insuring your child’s life, while the rest builds cash that you can withdraw.
If your primary purpose of the life insurance policy is to use it as an investment, you may want to consider other options, such as a children’s savings account.
As undesirable as it is to think about, losing a child is painful and may incur a high financial cost along with unbearable emotional trauma, especially if your child required intensive medical care. A life insurance policy will pay out a lump sum to cover burial costs and counseling for grieving parents. If such a tragedy occurs and you need to take time off from your business, the policy can help cover operational costs while you’re away.
Another factor you should consider when thinking about purchasing a life insurance policy for your child is value for money; the risk of going without a life insurance policy may be less than what the policy is worth. With the probability of a child between ages 5 and 9 dying in the United States being 0.6 in 1,000, you may be better off investing the money differently.
What to Know Before You Buy
Weigh the priorities you have as a parent against your finances. You may find that a life insurance policy of your own may be more important than one for your child as it can help your family manage if you were to pass away. However, even if you intend your child’s life insurance as an investment vehicle for their future, you may find that the fees adversely impact your return. This includes any fees that you will have to pay when it’s time to make a withdrawal for tuition or other purposes.
Wanting to guarantee your child can get affordable life insurance later on in life is a considerate thought as a parent. However, most young adults can secure a good term life insurance plan. With about half of Millennials overestimating the average cost of a policy for people in their age group, you may be placing too much importance on future insurability early on in your child’s life. This is a decision that each parent will have to make based on their own research and concept of risk.
Alternatives to Children’s Life Insurance
Financial institutions offer many other products and services that can better serve you and your child than taking out a children’s life insurance policy. In the case of a life insurance policy, beneficiaries receive a payment when the policyholder dies, called a death benefit. The death benefit amount is predetermined by a schedule you receive upon taking out the policy or when updating your plan.
Putting your money in an investment vehicle that has the potential to grow with the stock market may offer you a much bigger return. Investing in a mutual fund and taking out a life insurance policy as a parent can provide your family with the ideal combination of return on investment and financial security.
If your main goal is to build a fund for your child’s education, a 529 plan might be better than a life insurance policy. A 529 plan, also known as a Qualified Tuition Program, offers tax advantages to families trying to save for a child’s or grandchild’s education costs.
The savings in your 529 plan grow unaffected by federal income tax, and any withdrawals remain tax-free when you apply them toward qualified college expenses.
Life Insurance for the Parent
A life insurance policy for you or your spouse can benefit your child in the event that something happens to you while also providing for your spouse. Life insurance for adults comes in different types that allow you flexibility in premiums and payouts.
Contact a life insurance company about a policy that fits your budget and offers your loved ones the security they deserve.
Deciding on Life Insurance for Your Child
Life insurance aims to replace your income if you pass away to meet your family’s needs. Since, as a parent, you don’t depend on your child’s income, the need for a life insurance policy for your offspring may not be necessary.
On the other hand, if you want a low-risk way to put money aside for your child while guaranteeing they have affordable insurance coverage in the future, a children’s life insurance policy might be something to consider. Due to their lower premiums, grandparents may find paying a life insurance plan for your child a preferable gift.
At Finance is us, we offer a comprehensive collection of information on every financial matter, from mortgages and credit cards to finding the best life insurance and choosing a money market account. Learn how making informed financial decisions with the information at Finance is us can save you money and guarantee peace of mind for retirement.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.