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The pros and cons of life insurance for children

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Parents often buy life insurance for themselves to help safeguard their children’s futures. But, should they also buy life insurance for their kids? Although the idea of life insurance for children may sound unusual, it can serve some practical purposes and offer long-term benefits. Let’s learn more about the different types of children’s life insurance policies and the pros and cons of each.

Child Life Insurance

Child life insurance policies work essentially like other life insurance policies. The life insurance policy is paid for with premiums. If the insured passes away while the policy is in force, the named beneficiary receives the death benefit. Depending on the type of policy and the insurance company, it may be possible to convert the child’s life insurance policy at age 18, enabling the young adult to secure continued coverage – often without the need for a medical exam.

Although the details vary depending on the terms offered by different life insurance companies, child life insurance policies may provide several potential benefits:

  • It can be easy to qualify for coverage. Policies for adults may require medical underwriting with a doctor’s visit and medical tests, but life insurance for children often uses simplified underwriting with no medical exam required.
  • Children may be able to lock in low rates. Life insurance premiums vary depending on the risks, so younger and healthier individuals typically qualify for better rates – and that includes children.
  • The policy may accumulate cash value. This is only true for some types of life insurance, such as whole life insurance. By the time the child reaches adulthood, the value could be substantial, and it may be accessible to help with expenses such as college tuition.
  • The death benefit could help cover necessary expenses. When a child dies, parents may face thousands of dollars in funeral costs. The grieving parents may also need to take an extended period of time off work, and this may involve going without a paycheck. Child life insurance can help cover these costs so surviving family members can focus on healing.

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Life Insurance Policy Options

Just as there are several types of life insurance policies for adults, there are also different types of life insurance policies for children. The two most common types are children’s term life insurance and children’s permanent life insurance.

  • Term life insurance has a pre-determined coverage period. The policy expires once the term ends, although it’s often possible to renew coverage or convert the term policy into a permanent life insurance policy. Children’s term life insurance is often offered as a rider on the parent’s life insurance policy.
  • Permanent life insurance remains in force as long as the premiums are paid, so unlike term life insurance, there is no expiration date. Additionally, these policies typically accumulate a cash value that the policyholder can access during their lifetime. Two common types of permanent life insurance are whole life insurance and universal life insurance. Universal life insurance is more flexible with adjustable premiums, but whole life insurance offers the stability of fixed premiums and guaranteed cash value growth, making it more common for children’s life insurance.

Learn more about the differences between term and permanent life insurance policies

The Pros and Cons of Term Life Insurance for Children

One of the main advantages of term life insurance is that it can be very affordable. In fact, it’s much more affordable than many people realize. In fact, an article from Forbes reveals that more than half of Americans overestimate the cost of life insurance – some by as much as 150 percent.

In reality, purchasing term life insurance can be a cost-effective way to secure coverage, and adding a child life insurance rider to a parent’s policy can be even more cost-effective.

However, the downside to term life insurance is that it comes with an expiration date. This disadvantage is mitigated by the fact that term life insurance can often be renewed or converted to a permanent policy. However, if the window for this is missed, there may be no option other than to let coverage terminate when the child reaches adulthood.

When children’s term life insurance is secured through a rider, the child will lose coverage when the parent’s policy ends, and there may be no way to convert or renew the child’s coverage. The child may also lose coverage upon reaching a certain age, depending on the terms of the rider.

The Pros and Cons of Whole Life Insurance for Children

Whole life insurance is popular because it can provide coverage for the policyholder’s entire life, as long as the premiums are paid. Once you lock in coverage, you don’t have to worry about being unable to qualify due to poor health or old age. Whole life insurance policies can also be appealing because of the cash value, which can be accessed in several ways, including borrowing against the policy.

Whole life insurance may also offer tax advantages. Life insurance benefits are usually not subject to income taxes, and while this is generally true for both permanent and term life insurance policies, permanent life insurance policies can offer an additional tax benefit. The cash value that accumulates enjoys a tax-deferred status, meaning the policyholder does not owe taxes as long as the interest gained is left in the account or taken out in the form of a loan.

However, there are also downsides to consider. Whole life insurance policies tend to be much more expensive than term life insurance policies, which is why parents may opt for term coverage when insuring their children.

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Should you purchase life insurance for your children?

Children’s life insurance can make sense in many situations. To determine whether life insurance makes sense in your case, consider the following questions:

  • Can you purchase children’s term life insurance as a rider or your own policy? Some life insurance policies include an option to add coverage for children using a rider. This may increase the cost of the life insurance premium, but the increase may be small, so this may be an affordable and worthwhile option.
  • Does the child have any health challenges? Children’s life insurance may be a smart option for children who have serious health conditions or who are genetically predisposed to serious health conditions. Securing coverage when the insured is a child may be the best way to lock in affordable coverage. With the right type of policy, the child may be able to keep coverage when they reach adulthood, when securing coverage on their own might be difficult due to their medical condition.
  • Do you want to give whole life insurance as a gift? Some parents or grandparents buy a policy for a child so that the child can lock in lifetime coverage and gain access to the cash value after reaching adulthood.

Interested in life insurance for children? As one of the largest insurance and financial services firms in the nation, Higginbotham’s team can access products from a variety of life insurance carriers. We can help you compare your options to help you find the best possible coverage for your unique situation. Talk to a member of our team today.

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