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Life Insurance for Children: Is it Worth It?

Parents have many financial decisions to make as soon as they have a baby. How to plan for the child’s future? How will we afford college? Life insurance companies like to market to new parents because new parents are more likely to make decisions based on emotions rather than financial savvy. Is life insurance for children worth it? Should you buy a policy, and if so, what kind of policy? 

How Children’s Life Insurance Policies Work?

Most insurance policies for children are whole life policies.  These policies build cash value over time. Life insurance companies market them as “a great way to save for college” and to “guarantee future insurability.” Often, these policies are known as “jumping juvenile” life insurance policies, because the amount of coverage automatically increases when the child turns 21. 

Parents and grandparents can purchase a life insurance policy up until the child is 15. They are sold in increments of $1,000 and the most insurance you can purchase for a child is usually $50,000. That would become $100,000 when the child reaches 21 and there’s no increase in premiums. 

Pros and Cons of Life Insurance for Children

Pros:

  • Finance a college education
  • Guarantee future insurability
  • Funeral expenses would be covered
  • Premiums are very low

Finance a college education: Because these are whole life policies, they build cash value over time. Life insurance companies point out that this a great way to save for college. In the event your child doesn’t go to college, you can apply the cash value to trade school, a down payment on a house, travel, or whatever else the child wants. 

However, just because the policy is technically worth $100,000 (as an example) doesn’t mean you have $100,000 worth of cash to spend. Cash value builds slowly, and college is quite expensive. This doesn’t take inflation into account, and college costs have steadily risen at more than three times the rate of inflation for the past twenty years. 

Furthermore, some states actually limit the amount of life insurance you can purchase on a child, generally up to $50,000 which leads to a very small cash value amount in 20 years. 

Guarantees future insurability: Another point is that if your child is later diagnosed with some medical problem later in life, he/she will have this insurance already in place. You can purchase more life insurance as an adult without a medical exam. 

This probably doesn’t make sense for most people. The chances your child will develop an uninsurable condition are pretty remote. An exception might be if a genetic condition runs in your family, but most young adults can get life insurance policies at low rates. 

Funeral Expenses:  According to Child Trends, after the first year of life, the chances of your child dying before they reach adulthood is about .5 percent. It’s extremely unlikely and it probably makes more sense to add a child rider to your own life insurance policy. 

Premiums are very low: The Gerber Grow-up plan offers a $50,000 life insurance policy for about $33 a month. So, yes, premiums are pretty low. 

Cons of Children Life Insurance

  • Children don’t have any income
  • There are better investments 
  • Even the largest child life insurance policy is small for an adult

Children have no income: Life insurance is to provide for your dependents if you die and they can no longer count on your income. Unless your child is some kind of child star and is supporting your family, they don’t need life insurance. 

There are better investments: The average return on a whole life insurance policy is very low.  If you invested the money you put into premiums into another investment vehicle, you could earn more money. 

Even a large policy for a child is small for an adult: Some states limit the amount of life insurance you can purchase for a child. If you buy a $50,000 jumping juvenile policy and it becomes a $100,000 policy when they turn 21, that’s still a small amount of insurance money for an adult. 

Alternatives to Children Life Insurance

There are other options to consider, instead of life insurance for children, that meet the same goals. 

529 plans: 529’s are tax-advantaged savings accounts that encourage parents to save for college expenses. There are two types:

  • Prepaid tuition
  • Education savings plan

Prepaid tuition lets you purchase credits at a participating college or university (usually public, in-state colleges) at today’s rates. 

Education savings plans lets you open an investment account to save for qualified higher education expenses, including room and board, which is not included with prepaid tuition plans. What these plans offer is if, for some reason, your child doesn’t go to college, it will pay a small return on your investment. 

Get more insurance for yourself: Instead of insuring your non-working child, it probably makes more sense to get more insurance for yourself. This way, if you die, your whole family will be taken care of financially. 

Get a child rider: A rider attached to your own term life or whole life or universal life insurance policy will cover funeral and burial expenses in the event your child dies. You can name children, step-children, or adopted children in the rider. Your child will be insured until they are either 22 or married. 

Last Thoughts

Financial advisors usually recommend that parents save for retirement and have reserve savings before even thinking about life insurance for a child. Child life insurance is not recommended as an investment strategy and there are better ways to save for a college education. If you’re really concerned about funeral expenses, you can add a child rider to your own insurance for a low cost. 

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