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A typical life insurance scenario involves a new parent buying a policy to ensure their family’s financial security in the event of their death. With life insurance in place, the family knows it can pay off their mortgage and other debts, pay regular expenses, and even send a child to college in the absence of one of their breadwinners. In this scenario, the parent is the policyholder, and the child is a policy beneficiary.
But what if the child is the policyholder and the parent is the beneficiary? While a less common scenario, life insurance for a child is not unheard of. Buying a policy for a child—even an infant—can help pay for end-of-life expenses if the child dies unexpectedly, start to build savings that the child can access when older, or ensure the child has coverage even if they later become uninsurable due to their health or other reasons.
What is life insurance for a child and how does it work?
There are two ways to get life insurance for a child—a standalone policy or adding a child to an adult’s existing policy.
Standalone life insurance policy
In this case, a parent, grandparent, or guardian purchases a life insurance policy in the child’s name. This is typically a permanent life insurance policy, such as whole life, which will remain in force for the rest of the child’s life. Permanent life has the added benefit of a cash value feature, providing the child access to cash when they get a bit older.
Death benefits are typically low—most insurers that offer these policies provide no more than $50,000 worth of coverage. The parent, grandparent, or guardian is responsible for paying the policy premiums until the child reaches a certain age—usually 18 or 21, depending on the insurer. After that, the child must continue to pay the premium to keep the policy in force.
Rider on a parent’s, grandparent’s, or guardian’s policy
Some insurers allow an adult policyholder to add a child to an existing term life insurance policy. In this case, full ownership of the policy transfers once the child becomes an adult. The adult child may be given the opportunity to convert the term life policy into a permanent life policy that remains in effect for the rest of their life, provided they pay premiums on time.
Pros of buying life insurance for a child
Buying life insurance for a child may not be the first thing to cross a new parent’s mind. But there are some compelling reasons to consider doing it.
Pay for end-of-life expenses
We live in a time when childhood mortality is, thankfully, at historical lows. But tragic deaths do still happen. Life insurance can provide a family with financial support when they should be focused on mourning. A payout can help pay for medical expenses and funeral costs, and even help cover missed income for a parent who steps away from work for a while.
Ensure your child will always have life insurance
Health conditions, such as heart disease or diabetes; occupations, such as construction or transportation; or risky hobbies, such as skydiving, can make it more difficult for an adult to get life insurance. Having permanent life insurance from an early age can ensure that a child always has at least some coverage.
Lock in lower premiums
The younger you are, the less you pay for life insurance, and nobody will have a lower premium than a child. With most types of permanent insurance (such as whole life), the premium remains stable for the policy's life. This means your child will carry that low cost into adulthood.
Give your child access to cash value
Permanent life insurance features cash value. This acts as a savings account, funded by part of the policy premium and augmented with interest payments from the insurer. When older, the child can access this cash value through withdrawals or loans against the policy. The money can then be used for any purpose.
Cons of buying life insurance for a child
There are also some cons to consider when deciding whether or not to buy life insurance for a child.
Coverage amounts are limited
Insurers limit the amount of coverage you can buy for a child—typically to $50,000 at most. This amount of money may suit many purposes while the child is still a minor, but it’s unlikely to be a sufficient amount of coverage once the child becomes an adult.
Cash value offers low returns
Whole life insurance cash value offers an average rate of return of 1.5%, according to Consumer Reports. You may be able to do a bit better than average, but it's unlikely that the policy would easily keep pace with the inflation rate. If you're looking for an investment vehicle for a child's future, you might consider something like a 529 plan to help pay for college.
Premium must always be paid
As with any type of insurance policy, the premium must be paid for the policy to stay in force. What might seem easy to budget for today may seem less so in 10 years.
How much does life insurance for a child cost?
According to Choice Mutual, an online insurance agency specializing in life insurance, the cost per month of a children’s life insurance policy from Mutual of Omaha breaks down as follows:
|Coverage amount/monthly cost
Remember that premiums vary by company—this is provided only as an example. Discuss your life insurance needs with an independent agent or financial advisor to ensure you get the coverage you need at a price that suits your budget.
Who sells children’s life insurance?
You have multiple options when shopping for children’s life insurance. Here are a few companies that offer the coverage.
|A.M. Best Rating
Whole life. Child can convert to an individual whole life policy at age 25.
Whole life. Coverage up to $75,000 available.
Whole life. $50,000 coverage doubles at age 18.
Mutual of Omaha
Whole life. Eligible for ages 14 days – 17 years. $50,000 maximum coverage.
Source: Company websites and web.ambest.com
Alternatives to buying life insurance for kids
While you might find the idea of buying life insurance for a child intriguing, you should discuss your needs with a financial advisor to ensure you’re making the best possible decision.
You should also consider life insurance alternatives that allow you to set aside money on a child’s behalf. These include 529 accounts for educational expenses, custodial accounts that can be transferred to a child when they reach adulthood, or standard investment accounts.
TIME Stamp: Life insurance for a child offers multiple potential benefits
While buying life insurance for a child may not be top of mind for many parents or grandparents, it does offer some compelling advantages. You can help your child lock in low premiums and ensure they have coverage even if they become uninsurable as adults. But this approach isn't right for everybody, and good alternatives do exist. Discuss your needs with a financial advisor to ensure you're making the best decision for the child in your life.
Frequently asked questions (FAQs)
Is there a minimum age for buying life insurance?
Age requirements vary by insurance company. But it’s possible to get life insurance for a child as young as 14 days.
What is the maximum age for children’s life insurance?
Age requirements vary by insurance company. Typically, a parent, grandparent, or guardian can buy life insurance for a child under 18.
What is the best age to start life insurance?
Buying life insurance is common when your finances and family needs become more complex. Getting married, buying a home, and having children are all excellent reasons to invest in life insurance. Typically these things happen in adulthood. But there are some reasons to buy life insurance for a child, including the ability to lock in a low premium and ensure the child has coverage even if they become uninsurable as an adult due to their health or occupation.
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