Should I Get Life Insurance for My Child? A Candid Expert Opinion

The short answer, and it might surprise you, is usually no, buying life insurance for your child isn’t the most financially sound decision for most families. While the idea of protecting your child and securing their future might sound appealing, life insurance for children typically offers minimal financial benefit and your money could almost always be put to better use elsewhere.

Understanding the Emotional Appeal vs. Financial Reality

Let’s be honest: the thought of something happening to your child is every parent’s worst nightmare. The instinct to protect them, even after your own life ends, is powerful. Insurance companies understand this emotional pull, and often market child life insurance policies as a way to lock in low rates and provide a financial cushion should the unthinkable occur.

However, before you sign on the dotted line, it’s crucial to separate emotional reasoning from sound financial planning. While grief is immeasurable, the financial impact of a child’s death is typically far less significant than that of a working adult. This isn’t about devaluing a child’s life; it’s about understanding how insurance truly functions as a financial safety net against lost income and major debt.

Why Life Insurance Primarily Benefits Adults

Life insurance is designed to replace the income of someone who financially supports a family or to cover significant debts like mortgages. When a parent dies, their life insurance policy helps the surviving spouse and children maintain their standard of living, pay off debts, and fund future expenses like college.

Children, generally speaking, don’t contribute to household income. While there might be funeral expenses to consider, these are often manageable through savings or other means. The larger financial burden comes with the loss of an adult earner.

Where Your Money is Better Invested

Instead of paying premiums on a child’s life insurance policy, consider investing in your own term life insurance policy and ensuring you have adequate coverage. This will provide a much more substantial financial safety net for your family if something were to happen to you.

Additionally, consider directing those premium payments towards other financial goals like:

• Retirement savings: Securing your financial future so you don’t become a burden on your children.
• College fund: A 529 plan or other college savings vehicle offers potentially greater returns than the cash value accumulation in a child’s life insurance policy.
• Debt repayment: Reducing or eliminating debt frees up cash flow and reduces financial stress.
• Emergency fund: Having a readily available cash cushion can help you navigate unexpected expenses without going into debt.

Examining the Two Main Types of Life Insurance for Children

If you’re still considering life insurance for your child, it’s important to understand the two main types available: term life insurance and whole life insurance.

Term Life Insurance for Children

Term life insurance provides coverage for a specific period, typically 10, 20, or 30 years. If the child dies during the term, the policy pays out a death benefit. If the term expires and the child is still alive, the coverage ends.

While term life insurance is generally more affordable than whole life, it still has the same limitations. The death benefit is unlikely to significantly improve your family’s financial situation, and the premiums could be better used elsewhere.

Whole Life Insurance for Children

Whole life insurance is a permanent policy that provides coverage for the child’s entire life, as long as premiums are paid. It also accumulates cash value over time, which can be borrowed against or withdrawn.

Proponents of whole life insurance for children often highlight the cash value component as a potential benefit. They argue that the child can use the cash value later in life for things like a down payment on a house or to start a business.

However, the growth rate of the cash value is typically quite low, especially in the early years of the policy. You could likely achieve a higher return by investing in other financial instruments, such as stocks or mutual funds, even with the associated risks.

Furthermore, the cash value growth is tax-deferred, meaning you’ll eventually have to pay taxes on any gains when you withdraw the money. This can negate some of the benefits of the cash value accumulation.

Exceptions to the Rule: When Child Life Insurance Might Make Sense

While child life insurance is generally not recommended, there are a few exceptions where it might be worth considering:

• Pre-existing medical condition: If your child has a serious medical condition that could make it difficult or impossible for them to obtain life insurance later in life, buying a small policy now could guarantee their insurability.
• Riders on your own policy: Many adult life insurance policies offer riders that provide a small death benefit for children. These riders are often relatively inexpensive and can provide peace of mind. Adding this type of rider to your policy can negate the need for a separate life insurance policy for your child.
• Estate planning for wealthy families: In very rare cases, where the family’s estate planning requires liquidity, life insurance on a child might make sense.

However, even in these situations, it’s important to carefully weigh the costs and benefits before making a decision. Talk to a qualified financial advisor to determine if child life insurance is truly the best option for your specific circumstances.

Frequently Asked Questions (FAQs) about Life Insurance for Children

Here are some frequently asked questions to address common concerns and misconceptions about life insurance for children:

1. What if I want to ensure my child has money for funeral expenses?

Funeral expenses can be a burden, but they are usually not insurmountable. Consider setting aside a small amount of money in a savings account specifically for this purpose. Or, add a child rider onto your own policy. A child rider is typically inexpensive and provides a death benefit for your child at a more affordable price.

2. Won’t life insurance rates be lower for my child now, and they can have it for life?

While it’s true that rates are typically lower for younger, healthier individuals, the difference in premiums between a child’s policy and an adult’s policy is often negligible, especially when you consider the limited death benefit. As mentioned above, your money is almost always better spent on your own term life insurance, and then when your children become adults, they can acquire their own life insurance plans when they need it.

3. What if my child develops a serious illness later in life and can’t get insurance?

This is a valid concern, but it’s important to remember that advancements in medical technology are constantly improving treatment options and extending life expectancies. Even if your child develops a serious illness, they may still be able to obtain life insurance, albeit at a higher premium. And, as mentioned above, if there is a history of illness within the family, then adding a small rider to your policy may make sense.

4. Is there a cash value component in all life insurance policies for children?

No, only whole life insurance policies have a cash value component. Term life insurance policies provide coverage for a specific period and do not accumulate cash value.

5. Can I borrow against the cash value of my child’s life insurance policy?

Yes, you can typically borrow against the cash value of a whole life insurance policy. However, the interest rates on these loans can be relatively high, and borrowing against the cash value can reduce the death benefit.

6. What happens to the cash value of my child’s life insurance policy if I cancel the policy?

If you cancel the policy, you’ll receive the cash surrender value, which is typically less than the total amount of premiums you’ve paid. You may also have to pay surrender charges, especially if you cancel the policy within the first few years.

7. Are there any tax advantages to owning life insurance for my child?

The cash value growth in a whole life insurance policy is tax-deferred, meaning you don’t have to pay taxes on the gains until you withdraw the money. However, the tax benefits are often outweighed by the low growth rate and the potential for surrender charges.

8. How much life insurance should I get for my child?

It really depends on your motivation for purchasing a policy. If you are adamant on buying life insurance for your child, then you should get enough to cover any funeral expenses, and perhaps a little extra. However, if you are looking for a true investment, then you shouldn’t buy a policy for your child.

9. Can someone else buy life insurance for my child, like a grandparent?

Yes, with your consent, another individual, such as a grandparent, can purchase life insurance for your child. The same considerations and cautions apply.

10. What is a “child rider” on my own life insurance policy?

A child rider is an add-on to your existing life insurance policy that provides a small death benefit for your children. It’s usually a more cost-effective way to provide some coverage for your children than buying a separate policy for each child.

11. How do I decide if child life insurance is right for my family?

Consult with a qualified financial advisor who can assess your family’s specific needs and circumstances. They can help you weigh the costs and benefits of child life insurance and determine if it’s the right fit for your financial goals. Don’t just rely on the advice of an insurance salesperson, as they may be biased towards selling you a policy.

12. What are some alternatives to life insurance for my child?

Consider funding a college savings account, contributing to a Roth IRA, or simply putting money into a high-yield savings account. These options offer potentially greater returns and flexibility than a child’s life insurance policy.

In conclusion, while the desire to protect your child is understandable, life insurance for children is generally not the best use of your money. Focus on securing your own financial future and providing a solid foundation for your family. Only in very specific and rare circumstances might life insurance for a child make sense. Always seek professional financial advice before making any major financial decisions.