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Life insurance for children

Life insurance for children is often a hot topic on both sides of the argument. Should you consider purchasing a life insurance policy for your children? If so, what type of insurance should you purchase?

Should you purchase life insurance for your children?
The answer to that is dependent on why you are considering this. If you are considering this because it’s a sound financial decision in terms of premiums vs. death benefit, the numbers likely won’t work out. The technically correct answer is that children do not have financial dependents so there’s no one depending on them financially should they pass and thus no real need for life insurance.

However there are a number of non-financial reasons you may ‘want’ life insurance on children. First, for future insurability. A life insurance policy purchased today guarantees that your children will have insurance in the future. Again, this is not strictly speaking a financial decision. People purchase insurance for future insurability purposes because they have concerns about hereditary health issues or a heightened perception of the value of life insurance.

Secondly, a purchase of life insurance for your children is done as part of teaching them sound financial planning, and that insurance is a cornerstone of that lesson.

And finally, sometimes it’s simply purchased as a gift. Parents and grandparents will purchase life insurance simply to provide a gift of insurance to the children at some point in the future.

For the very wealthy and affluent there are sometimes some tax and estate reasons for purchasing insurance on children, but this is beyond the scope of this article.

Types of life insurance on children
There are two ways life insurance on children is commonly implemented. First, parents can purchase a ‘Children’s Protection Rider’ on their own policy. These riders typically provide a small amount of coverage for an inexpensive premium. Rates as low as $5-$10 a month for $10,000 of coverage on all your children are common.

These riders provide coverage until they are adults at which time the coverage can be converted to a permanent life insurance policy, thus guaranteeing future insurability.

This rider method is an easy way to get a small amount of coverage on children at a low price.

The second option is an individual policy on each child. As these policies are typically intended to last a lifetime, whole life insurance is a common choice. Whole life insurance provides level coverage for the insured’s lifetime.

Premiums for whole life insurance can be paid in one of two ways – level for life, or there are ‘quick-pay’ options where the policy is paid up in 15 or 20 years. The quick pay option is used when the purchaser wishes to give a policy to the children that has no more premiums due forever.

The one drawback to whole life insurance is that it develops cash values over the years. These cash values are typically accessed by cancelling the policy. Cash values are a very tempting target for people in their 20’s and early 30’s and I frequently hear from clients who had these polices purchased for them when they are younger, who then later cancelled them for the cash values. When clients relate these stories, it’s always with regret that they didn’t keep the policy.

To protect against this you may consider either educating your children on the cancelling of the insurance, keeping the policy until they are more stable financially, or purchasing a policy that has only limited cash values.

In addition, it’s vital to shop around for whole life insurance rather than dealing with just one company. Premiums for similiar coverage can vary dramatically, so locking in the best/lowest premium right upfront is vital – and that means dealing with a broker who shops more companies.

Do I recommend insurance on children? The answer is no – I don’t specifically recommend it. But I don’t specifically recommend against it either. It’s a personal decision rather than a financial decision. If you want a small amount of coverage on your children at an inexpensive premium, add a child rider to your policy. If you want a permanent policy for your children for the future, purchase a permanent policy such as a whole life policy. And if you choose not to place insurance on your children for emotional or financial reasons, that’s OK too.

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