Should You Buy Life Insurance for Your Children?

Life insurance is an essential financial tool for many people, helping to secure the financial future of loved ones in the event of an untimely death. But when it comes to children, the idea of purchasing life insurance may seem unnecessary or even uncomfortable. After all, life insurance is typically designed to replace the income of a breadwinner or help cover major expenses like a mortgage, neither of which applies to young children. However, buying life insurance for children is an option that some parents and guardians consider, and there are valid reasons to do so.

In this blog post, we will explore the pros and cons of buying life insurance for children, the types of policies available, how such a decision fits into a broader financial plan, and what factors you should consider before making this important choice.

1. Understanding Life Insurance for Children

Before delving into whether or not you should buy life insurance for your child, it’s important to understand what it actually entails.

Life insurance for children is typically a form of whole life insurance. Unlike term life insurance, which only provides coverage for a specific period, whole life insurance is permanent and includes both a death benefit and a cash value component that grows over time. When purchasing a policy for a child, parents or guardians are the owners of the policy, and they can pay premiums to keep it active until the child reaches adulthood. At that point, ownership of the policy can often be transferred to the child.

The death benefit of a child’s life insurance policy is generally much lower than that of an adult policy, often ranging from $10,000 to $50,000. This is because the primary purpose isn’t to replace income but to cover end-of-life expenses and provide some financial flexibility in the future.

2. Why Some Parents Choose Life Insurance for Their Children

Though purchasing life insurance for a child may not be necessary for everyone, there are specific reasons why some parents and guardians choose to do so.

A. Locking in Low Premiums

One of the biggest advantages of buying life insurance for a child is locking in a low premium. Since life insurance premiums are largely determined by age and health, children, being young and generally healthy, can qualify for very affordable rates. If you purchase a policy when your child is an infant or toddler, those low premiums can remain in place for the rest of their life. Over time, this could result in significant savings compared to purchasing a policy later in life.

B. Guaranteed Insurability

Life is unpredictable, and while children are usually healthy, there’s no guarantee that they will remain insurable as adults. Medical conditions, dangerous hobbies, or high-risk occupations can make it difficult or even impossible to qualify for life insurance in the future. By purchasing a policy early on, you can guarantee that your child will have life insurance coverage, regardless of any health or lifestyle changes they may experience later in life. Some policies even offer riders that allow the death benefit to be increased without requiring additional medical underwriting.

C. Building Cash Value

A whole life insurance policy for a child builds cash value over time. While the primary focus of life insurance is the death benefit, the cash value component can provide financial benefits throughout the child’s life. Once the cash value grows, it can be borrowed against or withdrawn for various purposes, such as education costs, purchasing a home, or starting a business. Additionally, the cash value grows tax-deferred, meaning it can accumulate without being subject to annual taxes.

D. Covering Funeral Expenses and Grief Support

While it’s difficult to think about, the tragic loss of a child can lead to significant financial expenses, including funeral costs, medical bills, and grief counseling. Funerals alone can cost thousands of dollars, and without insurance, these expenses can add financial stress to an already devastating time. Life insurance for children provides a death benefit that can help cover these costs, allowing grieving parents to focus on healing rather than worrying about financial burdens.

E. A Legacy Gift for the Future

Some parents view life insurance for children as a gift for their child’s future. The policy can serve as a foundation of financial security that the child can benefit from when they become an adult. Once the child reaches adulthood, they may have the option to take over the policy, continue paying the premiums, and use the cash value for their financial goals. It can also be a useful tool for teaching financial literacy and the importance of long-term planning.

3. Potential Drawbacks of Buying Life Insurance for Children

Despite the potential benefits, there are also reasons why buying life insurance for children may not be the best choice for every family. It’s important to weigh these drawbacks carefully before making a decision.

A. Opportunity Cost

One of the primary arguments against purchasing life insurance for children is the opportunity cost—the money spent on premiums could potentially be used for other financial goals. For example, instead of paying for a life insurance policy, parents might choose to invest in a 529 college savings plan or a custodial brokerage account that offers higher returns over time. These investment vehicles can help fund a child’s education or provide financial support as they enter adulthood.

While whole life insurance policies build cash value, the rate of return is typically lower than that of more aggressive investment strategies. Therefore, some financial experts argue that other savings or investment options might be a better use of money.

B. Unnecessary Coverage

Since children typically don’t have dependents or financial obligations, some people argue that life insurance coverage for them is unnecessary. The primary purpose of life insurance is to replace income or cover debts and expenses in the event of the policyholder’s death, and these considerations don’t apply to children. For many families, purchasing life insurance for parents and guardians—the primary breadwinners—takes priority over insuring children.

C. Limited Financial Flexibility

When you purchase a whole life insurance policy, you are committing to paying premiums for a long period. While the premiums for child policies are generally low, they still represent a financial commitment that may limit your flexibility in allocating money toward other goals. If you experience financial hardships or if your financial priorities change, maintaining the policy might become a burden.

D. Inflation and Future Needs

The death benefit of a life insurance policy for a child may seem adequate at the time of purchase, but inflation can erode its value over time. What might cover the cost of a funeral today may not be sufficient decades down the line. While some policies allow for the death benefit to be increased, this may require additional premiums or riders, and it’s worth considering whether the initial coverage will still meet future needs.

4. Types of Life Insurance for Children

If you decide to purchase life insurance for your child, there are a few different types of policies to consider. Each option has its advantages and drawbacks, so it’s essential to choose the policy that best fits your family’s financial goals and needs.

A. Whole Life Insurance

Whole life insurance is the most common type of policy purchased for children. It provides permanent coverage for the child’s entire life and includes a cash value component that grows over time. Premiums are typically fixed, and once the policy is in place, it guarantees that the child will have life insurance coverage, regardless of any future health issues.

Advantages:

• Permanent coverage.

• Cash value accumulation.

• Low, fixed premiums.

Disadvantages:

• Higher cost compared to other options.

• Slower growth of cash value compared to other investments.

B. Term Life Insurance with a Child Rider

Another option for insuring children is to add a child rider to an existing term life insurance policy for an adult. This rider provides coverage for the child, usually up to a certain age (often 18 or 25), and is much less expensive than a standalone whole life policy. However, the coverage is temporary and will end when the child reaches adulthood.

Advantages:

• Affordable.

• Easy to add to an existing policy.

Disadvantages:

• Temporary coverage that expires when the child becomes an adult.

• No cash value component.

C. Guaranteed Issue Life Insurance

Some insurers offer guaranteed issue life insurance for children, which doesn’t require a medical exam or underwriting. This type of policy is typically available for very young children or infants and can be an option for parents concerned about future insurability. However, these policies usually have lower death benefits and higher premiums than other options.

Advantages:

• Guaranteed coverage without medical underwriting.

• Peace of mind regarding future insurability.

Disadvantages:

• Higher premiums for the level of coverage.

• Lower death benefits.

5. Key Factors to Consider Before Buying Life Insurance for Your Child

Before purchasing life insurance for your child, it’s essential to take a step back and consider your family’s broader financial situation. Here are a few key factors to think about:

Current Financial Stability: Do you have sufficient life insurance coverage for yourself and other income-earning members of your family? If not, prioritizing life insurance for parents or guardians may be more important.

Emergency Savings and Investments: Do you have an emergency fund and savings plan in place? Have you started investing in your child’s education or future needs through a 529 plan or other investment accounts?

Long-Term Goals: How does life insurance for your child fit into your overall financial strategy? Are you primarily concerned with ensuring future insurability, or are you looking for a way to build long-term financial security for your child?