More and more people these days are taking life insurance policies out on their children, even just two weeks after they’re born.
This concept challenges the typical reasons someone takes out a life insurance policy. After all, life insurance is generally thought of as a way to protect your dependents should your income disappear and children (especially infants) are not typically the breadwinners in the household. So why take out a life insurance policy on a child? Is it worth the investment?
Why Do People Get Life Insurance on a Child?
Protect the parents. Many people who take out life insurance policies on their children do it in effort to provide financial protection for the parent. While children are generally healthy, unforeseen circumstances can arise. Having life insurance in place ensures that in the event of a tragedy, parents or guardians can receive financial support to cover funeral expenses, medical bills, or other unforeseen costs.
Locked-in rates. Another advantage to taking life insurance out on a child is that you’re locking in a typically low monthly cost. Moreover, some policies allow the child to convert the coverage into a larger policy without the need for a medical examination when they reach adulthood.
Accumulating cash value. Some parents use life insurance for their child as a means to start investing for them, by taking out a whole life policy. Whole life insurance accumulates cash value over time that the policyholder is able to use while they’re alive. The cash value grows tax-deferred, providing an additional financial asset for the child later in life.
Here’s Why You Should Not Get Life Insurance on a Child
While the reasons above can certainly look attractive, there are typically better ways to invest your money—for both you and your child.
There Are More Efficient Ways to Invest in Your Child’s Future
As far as accumulating a cash value goes, this part can seem very exciting and like an excellent way to set up your child’s financial future. But does it really work out that way? Your child would probably use that cash value component for things like a down payment on a home or covering education expenses. But is a whole life insurance policy the best way to build up that sum of money? Typically, no. Dig into alternative investment opportunities, such as education savings accounts like a 529 plan. Many parents find that 529 plans offer more benefits at lower cost.
They Will Likely Need More Coverage in the Future
One consideration is the likelihood that they will need more coverage as an adult, leading to the possibility of taking out another policy. Life circumstances change as children grow into adulthood, and their financial responsibilities may increase. Of course, the coverage on their policy could typically be adjusted once they reach adulthood. But once again, would your money have been better invested elsewhere? Most likely.
Children are Low Risk
The good news is, children are typically very healthy. Of course, there are tragic circumstances and outliers. But life insurance is designed to provide financial protection for dependents in the event of an untimely death. Using it for a different purpose is an option, but may not be financially advantageous.
Alternative Investment Options
Put the Money Aside Anyway
If you’re looking at taking out a life insurance policy on your child, get a quote and find out what that monthly cost would look like. Should you decide not to get a policy, vow to set that money aside anyway. Putting money in a savings account can feel much harder than paying a bill. But by saving up the money you would have given to an insurer, you can gradually build a fund that covers many of your reasons for wanting to take out a policy in the first place.
Add to Your Policy
If you already have a life insurance policy, there might be an opportunity to add a rider to your current policy. This type of coverage is specifically designed to provide a payout if the child passes away while the policyholder is still alive. This rider, often referred to as a child or family rider, offers an extra layer of financial protection in the unfortunate event of a child’s death. This isn’t something every insurer offers, but the policies we offer with Legal & General provide $5,000 or $10,000 options for a nominal fee. Contact us if that’s something you’d like to discuss, or simply get a personalized quote with our online calculator.
Get a Life Insurance Quote Online
The decision to purchase life insurance for children is a personal one, influenced by individual circumstances and financial goals. While some may argue that children are generally healthy and may not need life insurance, others see it as a proactive way to provide financial protection. Looking for coverage for yourself or another adult? Get a quote with our online calculator.
The bottom line: life insurance is designed to provide financial stability for the dependents of the policyholder. If your child is not financially independent, it probably makes sense to invest your money a different way.
Looking for more guidance? Give us a call and see what the experts think.
