Should I Get Life Insurance For My Kids?
No parent wants to consider the possibility of collecting a death benefit on their child’s life. And this is the reason many families are exploring the option of investing in a child life insurance policy to ensure their child’s long-term health and safety. So, you might ask yourself, “Should I get life insurance for my kids?
To assist with making an informed choice, we shall review the advantages and disadvantages and the policy options available to minors.
What Is Child Life Insurance?
Child life insurance offers a fixed death benefit for the insured child in the event of their passing. A parent, guardian, or grandparent may purchase a child’s life insurance. With this policy, part of the premiums goes to the cash-value account, accumulating interest and growing over time.
Permanent life insurance can be a critical component of an individual’s financial planning.
Unlike other life insurance policies, the death benefit from a child life insurance policy is paid out regardless of when the insured minor dies. This means that the death benefit is available even if the child dies of natural causes, such as illness or accident. The death benefit can help cover expenses such as funeral costs, medical bills, or other financial obligations associated with the child’s death.
How Does Life Insurance For Children Work?
Children’s life insurance can be purchased one of two ways: as a standalone whole life policy written for the child or as an add-on (called a rider) to a parent’s or guardian’s term or permanent life insurance policy.
You can purchase a life insurance policy for a child below 18 years old, but the cutoff varies by company. Death benefits are fairly low, $50,000 or less in most cases. Policies may contain what’s known as a guaranteed insurability rider, which allows additional coverage to be purchased once your child reaches a certain age or passes a specific life milestone, such as getting married.
The child is the insured party on the policy, and the policyholder is generally a parent, legal guardian or grandparent. The beneficiary of the policy can be the policyholder or another person chosen by the individual who purchases the policy. Premium payments are the responsibility of the policyholder and can be made monthly, quarterly or annually, depending on the insurance provider.
Most insurers will transfer ownership of a whole life policy automatically from a parent, grandparent, or guardian, to the insured child once they turn 18 or 21. Some may allow you to transfer ownership at the time of your choosing. In either case, premiums must continue to be paid on time in order to guarantee coverage continues.
With a child life rider or add-on to a qualified adult policy, ownership is usually transferred later, at age 23 or 25, depending on the insurer. If the child wants to continue coverage, they’ll need to convert the original policy rider into a new whole life insurance policy.
Benefits Of Getting A Life Insurance For My Kid
Child life insurance policies can accumulate cash value over time. It pays a death benefits payout, which can be used to help the family cover funeral expenses in the event of the child’s death. However, the main purpose of taking out this type of policy is not solely for these death benefits. Parents who take out child life insurance policies also dote on the following benefits:
It’s permanent
With whole life insurance, as long as you keep up with your monthly premiums, you can enjoy the peace of mind of having lifelong coverage. When your children reach adulthood, they can keep the same insurance policy they had as children. And it will be very cost-effective.
Guaranteed coverage
In addition to funeral expenses, you may be faced with medical bills for any accidents or illnesses your child suffered that are not covered by health insurance. Taking out a policy with guaranteed future insurability protects your child against any potential health issues.
Lock in low premiums
Securing life insurance for a minor at a young age provides coverage for a minimal cost over the duration of the contract.
Tax-deferred savings
A child’s life insurance policy does not directly impact your taxes. Any death benefit proceeds you receive on behalf of a child are typically not subject to income taxes. Additionally, if you are the policy owner, you can deduct any premiums you pay on the policy on your tax returns. It is important to note that these deductions may be subject to certain limits, depending on your filing status and income level.
Acts as an investment vehicle
You can access funds while the insured is alive by withdrawing money from the cash value account or borrowing against it. Upon attaining adulthood, the child may choose to surrender it and receive the accrued funds in full.
Consider The Drawbacks
Although a child life insurance policy is beneficial, it also has some drawbacks that should be considered.
Chiefly, long-term commitment can become a challenge in cash flow. If you encounter some money problems before the policy’s expiration date, you may be mandated to surrender the policy or utilize the accumulated cash value to make payment.
Its coverage is often too limited (generally up to $50,000) to be sufficient once the child reaches adulthood and has their own family.
If your goal is to create an investment for your child, you may want to consider other options before investing in a life insurance cash value account. Because these accounts require regular premium payments and can take some time to accrue value.
Alternatives To Children’s Life Insurance
To ensure your children have a solid financial foundation, there are several measures you can take to protect and provide for them.
Emergency fund
Rather than purchasing a life insurance policy for children, it is advisable to set aside funds in an emergency fund to cover any unexpected funeral expenses in the event of a tragedy. Storing away three to six months’ worth of living expenses should provide sufficient funds to cover burial costs.
A dedicated savings account
You can also set aside a substantial sum of money towards a long-term savings account specifically dedicated to college tuition, ensuring they have the financial support required to pursue higher education.
Add a Child Term Life Insurance Rider
If you have a life insurance policy, consider adding a children’s term rider to it. These riders are cost-effective and provide coverage for your children until they reach early adulthood or get married. Furthermore, you can easily convert the term rider to a whole life policy for your child when it expires, without them having to go through medical underwriting.
Group coverage for dependents
If you have group life insurance through your employer, you may have the option to purchase supplemental life insurance for your kids or spouse. However, it is vital to note that this coverage will only remain active while employed by the same employer unless you opt to continue the policy upon leaving the job.
Take Action to Safeguard Your Family’s Future
Before making any decisions about life insurance for your children, it is crucial to consider your family’s medical history, current financial standing, and long-term financial objectives. These factors will help ensure that you make the right choice for your family’s future.
A reliable financial advisor can assist you in determining the best way to factor this into your financial preparations so your children can gain the maximum advantage — even when they have their own families.
At Molen & Associates, our advisors can help you with your taxes, finances and even refer you to a great financial planner if you are looking to look into an insurance policy. With our expertise, you can be confident that you will receive sound advice and an optimal outcome. Contact us today to schedule a consultation, and let us help you make the best financial decision for your future.
