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, though, as it can lock in low rates and act as an investment vehicle for your children.
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 or grandparent.
In general, these policies are whole life products — a type of permanent 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 $140, according to Quotacy, a life insurance brokerage.
Whole life insurance also builds cash value — the policy’s investment component. A portion of the premium is paid into the account, which grows over time.
At certain ages, such as 18 or 21, the child can take ownership of the policy and continue coverage, buy more or cancel the policy altogether. You can also choose to maintain ownership.
The pros and cons of life insurance for children
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. “It allows you the right to buy a certain amount of insurance at a locked-in health classification in the future,” says Chantel Bonneau, wealth management advisor at Northwestern Mutual. This means the child can purchase additional coverage without completing a medical exam.
The additional coverage available varies among policies, and your 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 pre-existing condition, such as diabetes, or chooses a risky career, like becoming a pilot, both of which can dramatically impact the cost of insurance and your child’s insurability, Bonneau says.
Cons: Healthy applicants in their 20s are likely to secure competitive rates, so if you think the chances of your child developing a health issue are low, child life insurance may not be worth it.
2. Acts as an investment vehicle for your child
You can withdraw money from the cash value account or borrow against it. When the child reaches adulthood, he or she can surrender the policy and receive the funds in full.
Pros: The money can 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: Cash value accounts rely on you paying premiums, and can take time to grow. Some financial advisors recommend using other options before considering child life insurance as an investment vehicle.
If it’s in your budget, you can open a Roth IRA for the child, says Roxanne Martens, a financial advisor at CGN Advisors in Kansas. Or, if saving for education is your goal, look at options like 529 plans or a taxable brokerage account, she says.
3. Covers costs if the worst were to happen
Losing a child can be 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, Bonneau says.
Cons: It’s relatively uncommon for a child to die in the U.S. In 2018, the country’s infant mortality rate dropped to a historic low, according to the Centers for Disease Control and Prevention. Therefore, the risk of going without coverage may not outweigh the cost of the policy.
Before you buy
Assess your budget, review existing investments, and look at your own coverage needs before buying life insurance for your child.
“If you had to decide between the parent owning life insurance or the child, in most circumstances, we need to protect the parent that is bringing in all the money,” Bonneau says.
You may want to consider adding a child term life rider to your own policy instead of buying separate coverage for your kids. 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.
You may also find more cost-effective coverage through workplace plans, says Martens. “A lot of times they offer group policies for dependents, and that can be an inexpensive way to pick up a small amount of life insurance for children.”