Do I Need to Buy a Life Insurance Policy for My Children?
There are arguments for buying a life insurance policy for children and arguments against it. If you are reading this article after Googling, “Do I need to buy a life insurance policy for my child?” you’re probably in the early stages of researching this subject. In this article, we’ll try to show you the pros and cons of buying life insurance for a child. We also encourage you to contact a financial planner, someone who is very familiar with your entire financial profile, to see what the best way is for you financially prepare your child for the future.
Yes, there are several types of life insurance options and they vary in terms of price. However, it’s important to remember that the main three reason for life insurance are 1. to pay for final expenses, 2. to replace lost income and 3. to pay off debts after someone dies. When you apply these three concepts to children, there seems to be very little reason to buy life insurance.
So why does Gerber baby food also have a life insurance product? It’s important to note that there is a savings component to permanent life insurance (but not term life insurance), which is the main reasons most parents take out a policy in the first place. Another big reason parents sometimes take out a life insurance policy for a child is to ensure “insurability” for life insurance in the future. We explain everything below so you can decide what’s best for you.
Child Life Insurance as a Savings Account
Term life insurance is the most commonly bought type of life insurance. As the name suggests, it covers a term or a range of dates. This type of life insurance doesn’t have a savings component at all. Only permanent types of life insurance, like Whole life, Variable or Universal life insurance, have a savings component. With Term life insurance, if your child dies within the purchased timeframe, you will be paid an amount that can take care of cremation/burial and funeral costs as well as other family expenses. While it’s never specified what you should spend the claim money on, it’s often used by the family for personal time and services related to mourning or personal time off. If your child outlives the life insurance policy, you will not be paid out. Permanent life insurance never expires, so you will most certainly be paid out when the child dies, even as an adult.
Let’s take a look at the savings account component that only permanent life insurance products (Whole, Universal and Variable) offer. What’s called the Cash Value of an account grows over time, albeit slowly. This slow growth happens consistently over the years and is tax-deferred. Your child can borrow money against the Cash Value amount very easily and without trying to qualify based on credit alone. Your child also has the option of cashing out the policy, but there is a “surrender fee” to do this.
Some people use the Cash Value of permanent life insurance to fund a retirement. What they do is they borrow against this value to pay for living expenses. The Cash Value is tax-free and does not need to be repaid but it is deducted from the final payout unless you pay it back. Finance experts say that you should only borrow against the Cash Value if you have already used up your 401K and IRA.
Some people use whole life insurance to pay for medical bills when they are terminally ill. Your child can only do this if he/she has a whole life policy with “accelerated benefits.” The amount paid out during the illness is then deducted from the final payout after death.
Will a child life insurance plan’s Cash Value ever become significant?
If it’s a permanent life insurance product and your child does not touch those funds until retirement, there will be a somewhat substantial return on your investment. If they cash it out when they begin college, it won’t pay their college tuition but there will be a fair amount bestowed to them. The rate of return from a life insurance plan is usually only slightly more than a traditional savings account.
Child Life Insurance Stays Cheap if You Buy Young
Not only that but you are guaranteed life insurance later on. Life insurance, like health insurance, discriminates against age and people with medical problems. However, if your child has life insurance starting at a young age, he or she will qualify for coverage even if he/she develops a medical condition. However, most people under the age of 40 usually have no problem qualifying for life insurance. Also the amount of life insurance coverage that is guaranteed for sale later on in life is rarely enough to coverage someone adequately.
Life Insurance for Final Expenses and to Cover Debt
If you are buying Term life insurance for your child, the odds are that your policy term will end before your child passes (or so we hope). If you bought your child a permanent life insurance product like Whole life, Variable or Universal life insurance, whatever remains of the Cash Value portion of the policy after possible cashouts is what will be given to your child’s beneficiaries to take care of cremation/burial and funeral expenses and to pay off his/her outstanding debts.
If I Buy Life Insurance for My Child, What Kind Should I Buy?
If you have a child, it’s resoundingly the best advice to tell you to buy life insurance for yourself and your spouse before even thinking about buying a policy for your child. The chances of a child passing before adulthood are slim, but if you are worried about this or a high possibility of your child having a medical condition that may disqualify him/her from buying life insurance later on in life, it’s not a bad idea to buy a life insurance policy for your child. We highly advise you to also look at the savings component of permanent life insurance with your financial adviser. While it is a good idea to diversify investments and savings, the Cash Value of a permanent life insurance plan may not be where you want to create a surplus for your child’s future.
Can I Cover My Child Under My Life Insurance Policy?
Yes, you can buy some coverage for your child on your term life policy. In order to do this, you must buy a rider, which will extend a specified amount to your child (or other family members). You cannot extend coverage to your child with your own permanent life insurance. You’d have to buy one for your child.
Other Ways to Protect Your Child’s Financial Future:
- Start an emergency fund.
- Start a tuition fund.
- Make sure you and your partner have life insurance.
- Make sure you and your partner have disability insurance.
- Consider a 529 plan made exclusively for higher education costs.
- Start an IRA account.
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