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We all want our kids to live long, healthy lives, which is why child life insurance may not feel like a top priority. It’s worth considering, in rare cases, where you’re dependent upon your child’s income.
Learn more about this type of life insurance and find out if it’s the right choice for your family.
What is child life insurance?
Child life insurance covers the life of a minor and is typically purchased by a parent, guardian or grandparent.
In general, these policies are whole life products — a type opermanent life insurance. This means coverage lasts for the child’s entire life, as long as the premiums are paid. Coverage amounts tend to be low, often under $50,000, and premiums are locked in, meaning they won’t go up. The average annual premium for a $25,000 policy on a newborn is $150, according to Quotacy, a life insurance brokerage.
One of the benefits of whole life insurance is that it builds cash value — the policy’s reserve component. A portion of the premium goes to the cash value, which grows over time.
At certain ages, such as 21, the child can take ownership of the policy and continue coverage, buy more or cancel the policy altogether.
The pros and cons of life insurance for kids
When deciding if child life insurance is right for you, consider these three popular features.
1. Guarantees future insurability
Child life insurance policies typically include or offer a guaranteed purchase option. This means the child can buy additional coverage without completing a life insurance medical exam.
The additional coverage available varies among policies, and the ability to buy more may be restricted to certain ages or life events like marriage.
Pros: This feature can be useful if the child develops a chronic health condition such as diabetes, or chooses a risky career like becoming a firefighter. People with health problems or hazardous jobs typically pay much more than the average cost of life insurance.
Cons: You can’t predict if your child will ever have a need for life insurance. Healthy applicants in their 20s are likely to secure competitive rates, so if you think your child won’t need to find life insurance with a pre-existing condition, a child life policy may not be necessary. Coverage amounts are low and will most likely not meet a future life insurance need.
Coverage is usually issued at a standard (i.e., non-preferred) rate class, so it’s more expensive than coverage that can be purchased if your child is in good health at age 18.
2. Acts as a savings vehicle for your child
You can withdraw money from the cash value account or borrow against it. When the child reaches adulthood, they can surrender the policy and receive the funds in full. If you borrow a large amount from the policy, your child could end up, in a worst-case scenario, owing income tax on a phantom gain.
Pros: The money can help cover costs like school fees or a down payment on your child’s first home. It also grows tax-deferred, meaning you don’t pay taxes on the gains until you withdraw the cash.
Cons: Life insurance cash value accounts rely on you paying premiums and can take time to grow. Relatively low premiums mean that cash value will be low. If setting up savings for your child is your main goal, you may want to consider other types of investments first.
3. Covers costs if the worst were to happen
Losing a child is extremely painful, and you may incur unexpected costs. Child life insurance policies pay out a lump sum in the event of a death, as long as the premiums are paid.
Pros: The payout can be used for expenses like burial costs or grief counseling. It can also help cover the costs of running a business if you’re the owner and need to take time off.
Cons: It’s relatively uncommon for a child to die in the U.S, according to data from the Centers for Disease Control and Prevention . Therefore, the risk of going without coverage may not outweigh the cost of the policy. Consider setting up a rainy-day savings account with three to six months of income.
Before you buy
Assess your budget and look at your own life insurance needs before buying a policy for your kids. In general, your own life insurance is more important than your child’s because it can help cover your family’s living costs or other expenses if you were to die.
These are examples of situations where taking out a policy on your child might make sense:
Your child is an actor, model or social media star bringing in a substantial income.
Your child is a teenager who’s working part-time to help cover household expenses.
Your child looks after younger siblings and offers the kind of help you’d need to outsource otherwise.
You may want to consider adding a child term life insurance rider to your own policy instead of purchasing separate coverage for your children. In some cases, you can convert child riders to permanent coverage when the term is complete. Not all insurers offer these riders, and coverage amounts may be limited.