In the face of recent world events surrounding the COVID-19 pandemic, there is a new interest in life insurance for children. Generally, children have little need for a life insurance policy, except for in special circumstances. So when does it make sense to get life insurance coverage for your child, and are there alternatives?
Learn everything you need to know about child life coverage and shopping policies in 2021. Find out how it works, what you need to know when buying, and the rough-average monthly-premium. And, discover alternative solutions to children’s life insurance that make sense for your family.
Life Insurance for Children in 2021: How it Works and What Its For
Just like standard life insurance – life insurance for children is primarily a form of income protection. So, since a child doesn’t make income, you don’t need life insurance to cover the loss. This logic, however, ignores the financial obligations that accompany anyone’s untimely death, like funeral costs, as well as the potential benefits of investing in a permanent life insurance policy for your child.
In general, there are two umbrella reasons you might want to take out a life insurance policy on your child. The first is if your child has a chronic illness or other medical condition that poses a risk to their lives. The other reason you might take out a life policy on your child is as a form of long-term investment and savings for their future.
These two routes are quite different in the needs that they serve, as well as the general cost of monthly premiums. Breaking down children’s life insurance into these two categories helps you see the benefits, drawbacks, and practicality of both. The biggest difference between life insurance policies for kids is that one is term life and the other is permanent life.
How Does Life Insurance for Kids Work?
The biggest benefit of buying a life insurance policy for your child is if a critical illness of some sort will make it difficult for them to get insurance in their adulthood. When thinking about these policies, they are often whole life insurance and carry significantly higher premiums than that of a term life policy. Whole life insurance policies usually have monthly premiums that cost about 15-times more than the cost of term life insurance premiums.
But, the extra money you spend on a child’s whole life insurance policy is not wasted. They usually carry a cash value in the form of a policy rider, which is accessible by your child in their lifetime. So, in a way, the policy includes a savings account with dividends.
What You Need to Know When Shopping Insurance Companies
That being said – this type of investment is criticized by some economists for having a low rate-of-return, high-rates, and fees that can make these policies untenable. For those able to afford the high-premiums for their lifetime, the benefits remain intact for the life of your child, without any changes based on the state of your health. But, if you are unable to sustain the policy premiums for the duration of the policy – or you transfer the policy to your adult child and they are unable to continue payments – the cash benefit can be significantly impacted.
Most children’s whole life insurance policies max-out at age-18. So, with most insurers, you can still create a policy for a child who is 17 years old. Gerber Life, however, will not create a policy for children over the age of 14, and the policy automatically transfers to the underwritten child when they turn 21.
Is Life Insurance a Cost-Effective Way to Save for My Child’s Future?
If you are looking at a way to save for your child’s future, a whole life insurance policy is certainly a valid route. It provides a death benefit, as well as a savings account that allows you to borrow money against the balance later in your life. So, opening a new policy for a young child can provide a means to pay for expenses in their adulthood, like college.
The main benefit of using a whole life insurance policy to help pay for college is that it is not recognized as a financial asset when calculating your financial aid. Some economists advise against the whole life policy, instead recommending you open a 529 plan to save for your children’s college. The 529 plan, however, does count as an asset in terms of calculating your child’s eligible financial aid.
Whether for future savings or because of an illness, a child life insurance policy is only one way to plan for expenses. And, navigating the options available can be overwhelming without help. Get a free consultation with an insurance associate to learn more about whether you should look into getting life insurance for children in your family.