By Brad Cummins
Learn more about Brad on NerdWallet’s Ask an Advisor
Although it’s terrible to think about, the truth is that the unimaginable — losing a child — can happen. A parent may never fully recover from it emotionally.
A child’s death also raises financial issues. Is that a reason to purchase life insurance on someone so young?
Many opponents of purchasing life insurance on children say doing so is unnecessary, primarily because parents aren’t likely depending on their child for financial support. They also argue that the money spent on premiums for this coverage could be better spent if it were used for additional protection on a parent or put into a college savings plan for the child.
In many cases, this reasoning is sound. However, even though most children don’t have an income to replace, there are still several benefits to purchasing life insurance coverage on a child.
Certainly, no amount of money could ever make a parent whole after the loss of a child. But should the unthinkable occur, life insurance proceeds can help pay for funeral costs and other final expenses that would need to be addressed. Today, funerals can cost over $7,000, an amount that many families simply do not have readily available. Coverage on the life of your child can provide the proceeds that you need during a difficult time.
Although putting money into an emergency fund can also be another option for funding final expenses, a life insurance policy can guarantee that you will have a certain amount of money from the day the policy is purchased. And because the premium cost for children is typically quite low, usually just a few dollars per month, many families are able to buy life insurance coverage and also funnel money into an emergency fund.
In addition to funeral costs, there may be medical expenses due to an accident or illness your child suffered before his or her death that are not covered by health insurance. Life insurance policy proceeds can also help pay these obligations.
Having life insurance coverage on a young child can also help ensure protection when he or she gets older. This can be especially beneficial if your child develops various health issues over time and has trouble getting life insurance.
If, for instance, the child is insured with a permanent life insurance policy, the coverage can remain in force throughout his or her lifetime, provided that the premium continues to be paid. And, with a permanent life insurance policy, the amount of the premium is guaranteed to remain the same. Regardless of age or adverse health issues, the insured will pay the same amount of premium that was charged at the policy’s inception.
A permanent life insurance policy can also help the child to build tax-deferred savings in the cash value component of the plan. Because no taxes are due on the growth of the cash until the time funds are withdrawn, the money can grow and compound throughout the years.
Although tax-deferred savings are also allowed in IRAs and qualified retirement accounts like a 401(k), people may face taxes and penalties if they withdraw funds from these types of accounts before age 59½. If, however, life insurance policyholders wish to borrow against the policy, they can often do so tax-free at a low interest rate, and if they wish to withdraw their funds, they can often avoid surrender charges once a certain amount of time has elapsed.
Having a cash value life insurance policy can also provide a place for additional savings if the parents have already contributed the maximum amount to their IRA or 401(k) and still have more funds to invest.
Types of coverage
If you decide that purchasing such a policy makes sense for you, you have several options for covering your child. One way is to simply add an additional insured rider to the life insurance policy of a parent. This is often less expensive than purchasing a separate policy for the child, provided that the rider is allowed on the parent’s existing coverage.
A child could also be covered with his or her own individual life insurance policy. Typically, children may be insured using either term or permanent life insurance coverage. Similar to adult coverage, a term insurance policy will likely be cheaper than a permanent policy.
But remember that a permanent policy will allow the child to have cash value build up within the policy, as well as offer the possibility for permanent insurance coverage throughout the child’s entire life.
Purchasing a life insurance policy on a child can be a wise choice to ensure that family finances stay intact in the event of a child’s death. But there are many variables to consider when buying such a policy. Before moving forward, think through how much coverage your family needs, which type of coverage seems best for your situation and how a policy fits into your overall financial plan. You can also work with an insurance professional or advisor to help assess your coverage needs.