Life insurance is often something you purchase as a way of securing yours or someone else’s financial future. In fact, if you want to take out life insurance for someone else, such as a parent, you need to prove that their death would impact your finances significantly. So where does that leave you if you want life insurance for children, is this even possible and if so, why?
In this guide to life insurance for children we will cover the what and the why, before telling you how you can purchase it for your own children.
Do Children Need Life Insurance?
There are two reasons why you would purchase life insurance for a child. The first is because the child brings money in for your family and you rely on them to live. This is the case with child stars whose parents spend all of their time and their money on them. The second reason, and the most common, is that the life insurance policy, when bought young, can be very cheap and can grow into something much more valuable at a later date.
Technically there is also a third option and that’s simply because you can. As discussed below, there is a way that you can buy life insurance for a child without any extra stress and without much extra money, and if the option is there then you might feel inclined to take it whether you see this as a valid investment or not.
How to Buy Life Insurance for a Child
There are two types of life insurance that you can purchase for a child and these need to be purchased in specific ways. It’s not like purchasing life insurance for yourself, as discussed in our guides to Life Insurance for Seniors and Life Insurance with no Medical, and we have described the differences below.
Before we discuss these, it’s worth noting that there are not many policies out there that are specifically tailored towards children, but plenty of ways that you can add children to existing ones.
Whole Life Insurance for Children
This is probably the best way to get life insurance for a child and the one that is marketed the most to parents across the United States. This is policy that agrees to payout on the death of your child and will last for their lifetime providing they continue to make the payments.
But it is much more than a death benefit. In fact the amount that they agree to pay out is typically very small, and the main benefit behind this insurance policy is the fact that it comes with a savings account and can be used to build towards your child’s future. By purchasing this life insurance policy for your child you are basically negating the need for them to do the same when they are in their 20s or 30s, and also ensuring that they have an amount of money they can tap into when they are in need.
But there are downsides to this policy. As mentioned above, the death benefit is not great and and can appear to be a token amount when compared to term life insurance. Also, the premiums are much higher.
Term Life Insurance for Children
A term life insurance policy, as discussed in our guide to Term vs Whole Life Insurance, is something that covers you for a set period of time, be that 10 years or 30 years. You pay a monthly amount based on your age, your health and your lifestyle choices, and they agree to pay a lump sum if you die within the agreed upon time. The higher you want the lump sum to be, the greater those monthly payments will be.
When you take out these policies one of the options you will be given is to buy something known as a “rider”, which is basically an additional person added to your policy. You can add any other family member to your policy by doing this and it basically means that if they pass before you do then a small amount of money will be paid to you.
This is the quickest and easiest way to add a child to a life insurance policy, but it differs significantly to the whole life insurance we discussed above. With term life there is no savings account and there is no guaranteed payment. If the previous agreed term ends without a death then no money will be paid out, the policy will end and everything you have paid until that point will remain with the insurance company.
Should You Buy Life Insurance for a Child?
This is a controversial topic and one that parents will think differently about. It really all comes down to two questions:
- Does your child make a lot of money and do you rely on this money in any way?
- Do you have your other investments and policies all tied up?
In the case of the first, you are securing your financial future much like you would if you were to take out a policy for your parents. It’s not a comfortable topic to talk about in any case and it’s worse where your children are concerned, but if there are other children on the scene then you may owe it to them as much as you owe it to yourself. And you’re merely preparing for the worst case scenario, which is always a good move.
The second question is there because we believe, like many other financial experts, that a child’s life insurance policy should only be purchased in full if you have looked at other options first.
If you are doing it for them, as is the case with whole life insurance for children, then it means you are preparing them for a better future and making sure there are no serious financial worries. But if this is the case there are other things that you should do first. Get them a savings account, buy bonds, stocks—anything. There are so many better ways to invest for their future if you have the money and the means to do it.
In that case a whole life insurance policy should only be considered for your child if you really want to go the extra mile for them and have already wrapped up every other possible angle.