We all want our children to live long, healthy lives, which is why child life insurance may not seem to be a top priority. It’s worth considering because it can lock in low prices and act as an investment tool for your kids.
Learn more about this type of life insurance and find out if it is the right choice for your family.
What is child life insurance?
Child life insurance covers the life of a minor and is usually purchased by a parent or grandparent.
In general, these policies are products of a lifetime – a species permanent life insurance. This means that the coverage lasts for the whole life of the child, as long as the premiums are paid. Coverage amounts are usually low, often below $ 50,000, and premiums are locked, meaning they won’t grow. The average annual premium for a $ 25,000 newborn policy is $ 140, according to Quotacy, a life insurance brokerage house.
All life insurance also builds monetary value – investment policy component. Part of the premium is paid into an account that grows over time.
At certain ages, such as 18 or 21, a child may take ownership of the policy and continue to cover, buy more, or cancel the policy altogether. You can also choose to keep the property.
Advantages and disadvantages of life insurance for children
When deciding if child life insurance is right for you, consider these three popular features.
1. Guarantees future security
Children’s life insurance policies usually include or offer a guaranteed purchase option. “It gives you the right to buy a certain amount of insurance under a locked-in health classification in the future,” says Chantel Bonneau, a wealth management consultant at Northwestern Mutual. This means that the child can buy additional coverage without taking a medical examination.
The additional coverage available varies from policy to policy, and your ability to shop may be more limited to a certain age or life events, such as marriage.
Pros: This feature can be useful if the child develops a existing condition, like diabetes, or choosing a risky career, like becoming a pilot, both of which can dramatically affect your child’s insurance costs and insurance, Bonneau says.
Against: Healthy applicants at the age of 20 are likely to provide competitive rates, so if you think the chances of your child developing a health problem are slim, child life insurance may not be worth it.
2. It acts as an investment tool for your child
You can withdraw money from a cash account or borrow it. When the child reaches the age of majority, he can hand over the policy and receive the funds in full.
Pros: The money can cover expenses such as tuition or an advance in your child’s first home. Tax deferral is also growing, which means that you do not pay income tax until you withdraw cash.
Against: Cash accounts rely on your premium payment, and growth can take time. Some financial advisors recommend using other options before understanding child life insurance as an investment vehicle.
If it’s in your budget, you can open a Roth IRA for a child, says Roxanne Martens, a financial advisor at CGN Advisors in Kansas. Or, if your goal is to save on education, look at options like 529 plans or a taxable brokerage account, she says.
3. Covers costs if the worst has happened
Losing a child can be extremely painful and can lead to unexpected costs. Child life insurance policies are paid once in the event of death, as long as the premiums are paid.
Pros: The payment can be used for expenses such as funeral expenses or mourning counseling. It can also help cover the cost of doing business if you own and if you need to take a break, Bonneau says.
Against: It is relatively uncommon for a child to die in the United States. The infant mortality rate in the country fell to a historically lowest level in 2018, according to the Centers for Disease Control and Prevention. Therefore, the risk of leaving without coverage may not exceed the cost of the policy.
Estimate your budget, review existing investments, and look at your coverage needs before you buy life insurance for your child.
“If you had to decide between a parent who has life insurance or a child, in most cases we have to protect the parent who brings all the money,” Bonneau says.
Perhaps you should consider adding a child driver to your child instead of buying a separate cover for your children. In some cases, you can turn child riders into permanent coverage when the term is over. Not all insurers offer these drivers, and coverage amounts may be limited.
You can also find more cost-effective coverage through workplace plans, Martens says. “Many times they offer group policies for dependent members, and that can be a cheap way to provide a small amount of life insurance for children.”
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Georgia Rose writes for NerdWallet. Email: [email protected]