Child Life insurance for your kids may not be at the top of your list right now. With school taking place virtually and a pandemic raging around the United States, it’s no shocker that you may have other things on your mind.
Companies that sell policies will market coverage as a “great way to protect your children and build them a savings nest egg.” This is referring to their future insurability (no matter how healthy they may or may not be), or the savings component of certain policy specifics we’ll see later.
Despite this fact, many financial advisers do not recommend spending money on child life policies because there are far more suitable ways to protect your kids financially amongst other reasons. Let’s take a moment to delve deeper into the pros and cons of life insurance for children.
How Kid Life Insurance Works
The majority of policies for kids are “whole life” which means your child is protected for the duration of their lifetime (as long as premiums continue to be paid.) Whole life also has a savings component that accrues cash value over time as you pay further into the policy.
There are loads of places to consider buying a policy as nearly every major life insurance company out there offers some form of a child policy. When your child or grandchild reaches adulthood at 18 years of age you simply transfer ownership of the policy to them.
The other offering for life insurance is known as “term life insurance”, which lasts for a specific length of time (usually terms of 10, 20, and 30 years). Unfortunately, you cannot purchase a term life policy for your child on their own if you were planning on it. You will instead need to add them to your policy and increase your monthly premium marginally. When the term length ends coverage for your child or children also expires, or when they reach 18 years of age, whichever comes first.
This type of insurance policy is not incredibly common in the United States where between 15% and 20% of polled grandparents and parents say they have a life insurance policy for their children. When making your decision, be sure to look at the positive and negative aspects of buying a policy for your kids.
Pros of a Child Life Insurance Policy
Let’s first take a look at the benefits that a policy of this nature can offer your child.
Savings Component
The saving component of “permanent” or “whole” life insurance is known as the “Actual Cash Value” (ACV) and refers to the policies building of value over time. Policy owners can borrow against this as it is a collateral financial asset or can surrender the policy outright and receive the cash value (minus the surrender fee some insurance companies require). The ACV is also “tax-deferred”, which means you’re not taxed on that money until you receive it from a claim or surrender it to receive the cash.
The funds can be used for anything and everything. Nothing in the policy says it must be spent on one thing or another. It also doesn’t matter whether you are receiving the money as a beneficiary or from surrendering the policy, it is up to you how you use the payout cash.
Helps Your Child Qualify for More Life Insurance Later in Life
If your child develops an illness, life insurance companies will likely look at this as a risk and “pre-existing” condition which will prevent them from offering your child a life insurance policy. When you purchase coverage today, you ensure your child has some level of coverage and will be able to buy more when they reach adult age, no matter their health.
Provides Cash for Funeral Expenses
If a child dies, the life insurance death benefit payout can be used for things like cremation, counseling, medical expenses, funeral expenses, help with costs if a parent or guardian must take time away from work, and more. When tragedy strikes a little help can go a long way to helping your family get through the terrible time period.
Cons of Life Insurance for Children
You may be thinking, “how can a policy like this have a downside?”, but the fact is there are some drawbacks to consider.
Saving Component is Very Limited
Considering how slowly a life insurance policy will build value and the fact that monthly premium payments will undercut any returns, it tends to be looked at as a weak investment. There are lots of other ways to get a superior return on investment. Opening an IRA for your child or an investment portfolio offers a far greater upside, albeit with risk, to build value in the short and long term. Even some online savings accounts with interest rates less than 3% will provide a better investment in the long term.
Future Denial of Life Insurance Risk is Minimal
The truth is that most people in their 20’s and 30’s do not have a problem getting life insurance. The idea a policy can help guarantee future coverage for your child is accurate but it is a very expensive way to go about doing so. More often than not that “insurability” benefit is greatly limited by the original plan. If a policy only offers a death benefit of $10,000, it won’t go very far towards helping them get a $500,000 policy later in life. The numbers are just too small and don’t work out properly in the eyes of an insurance company.
Before You Buy Life Insurance for Your Kids
Whenever you’re considering a policy like this it’s important to look at your finances, income, debts, and expenses. Are you able to afford an additional monthly payment on top of all your current bills? Would it make more sense to invest the money into a different type of retirement or college fund for your child?
Knowing the cost versus benefit ratio is important to understand if a policy is worth your time and money. This is not only for you but also for your children as well.
