Life Insurance for Children: Why It’s Worth Considering
When it comes to life insurance, many people think it’s only necessary for adults who provide financial support for their families. However, purchasing life insurance for children can offer many benefits.
What Is Life Insurance for Children?
A life insurance policy for a child is a contract between an insurance company and a parent or guardian who is usually the policyholder. In simplest terms, the policy provides a benefit if the insured child passes away to help pay for final expenses. There are generally two ways to buy life insurance for a child:
- A separate life insurance policy specifically for the child
- A rider added to a parent’s life insurance policy, often called “children’s term life insurance.”
Life insurance policies that provide the most significant benefit for children are typically whole life insurance policies, which provide lifelong coverage as long as premiums are paid. A portion of the premium goes towards building cash value, which can be accessed while the child is alive for any reason.
Why Consider Whole Life Insurance for Children?
The most significant benefit of buying life insurance for a child is that you guarantee that your child will have coverage even if they develop a health condition later in life. If your family has a history of genetic medical conditions such as diabetes, it might make sense to insure your child. Then you won’t have to worry about whether your child will be denied coverage later in life if they develop a medical condition.
Locks in a Low Rate
Life insurance rates increase as you age, so purchasing a policy for your child while young can help lock in a low rate. You’ll never get a lower rate on life insurance than when a child is a newborn. Rates for buying a new policy will increase as the child gets older. Of course, you or your child will pay premiums over a more extended period, but the amount paid over time can be lower because of the super low rates for a child.
Provides Funds for Funeral Expenses
While the chances of a child dying are very low, a life insurance policy will provide funds to cover final expenses. In Saskatchewan, the average costs for a funeral range from $7,000 to $10,000. While costs can vary depending on burial arrangements, the costs of services tend to get more and more expensive each year.
Builds Cash Value
A portion of the premiums paid for a whole life insurance policy goes towards building cash value. When you buy a policy for a child, a more significant portion of the premium will go towards the cash value because the insurance cost is low, and there’s more time for the cash value to build. The cash value can be accessed similarly to an RESP. For example, it can help pay for schooling.
How do Life Insurance Policies for Kids Work?
A parent or guardian typically purchases life insurance for the children. Once they reach the legal age of 18, the parents/guardian will often transfer the whole-life insurance policy ownership over to the child.
A life insurance policy for a child can be a separate policy or a rider added to a parent’s life insurance policy. A child rider can be more affordable and can often be converted into a separate policy for the child once they’re an adult.
What’s the Best Age to Take Out Life Insurance for Children?
The minimum age for life insurance ranges from 0-14 days, meaning you can take out life insurance for your baby, child, or teen. No medical exam is needed to qualify for coverage, so you can easily enroll them whenever possible. However, enrolling them younger may result in a lower premium.
How Much Does it Cost to Insure a Child?
The younger your child is when you buy a policy, the cheaper it will be. With a whole life policy, the low rate you lock in at the time of purchase will often be guaranteed for the duration of the policy.
The coverage you buy and your chosen payment schedule will affect the amount you pay. The insurer might offer the option to pay off a policy within a certain number of years rather than throughout the child’s life. The shorter the payment period, the higher the premium will be, but it’s an option worth considering if you want to turn over a policy to your already-paid child.
However, you shouldn’t buy a policy based on the cost alone. You’ll want to look at internal fees and a policy illustration that shows how much the policy’s cash value will grow over time based on a guaranteed rate of return.
Life insurance for children can offer many benefits, including locking at a low rate, providing funds for funeral expenses, and building cash value. However, there are also drawbacks to consider, such as low rates of return and coverage amounts that tend to be low. Before deciding whether to purchase life insurance for your child, make sure you’ve prioritized other financial goals and consider working with a financial advisor to determine what’s best for your family.