Buying life insurance for your children may have never crossed your mind. After all, aren’t you the one who is likely to pass away first? But the right life insurance for your children can provide more than a death benefit. In fact, it can help set your kids up for a more secure financial future.
In this article, we’ll discuss why you should consider life insurance for your children, and three ways to buy child life insurance.
WHY DO I NEED TO BUY LIFE INSURANCE FOR MY CHILDREN?
Like any form of life insurance, policies for children pay out a death benefit if your child passes away. Although this is unthinkable for a parent, the payout can help provide financial peace of mind by helping to cover funeral costs or support parents who need to take an extended period of time away from work to grieve.
Fortunately, the far more common scenario is a healthy child who reaches adulthood and can use their life insurance policy as a springboard for financial success. Depending on the type of insurance policy you buy, it can help create a secure financial foundation in one of several ways:
Benefits of Life Insurance for Children
- It may open the door to a permanent life insurance policy without a medical exam, helping lock in a low insurance premium for life.
- It may accumulate cash value that can be signed over to your child in adulthood by transferring the ownership of the policy to them.
- It may provide tax advantages in adulthood, helping your child keep more of their wealth.
- It may offer tax-free policy loans, helping your child reduce reliance on banks or third-party lenders for purchases like a home or college tuition.
- It may be used as part of their retirement fund, and is free from market volatility.
- It may help protect your child’s future assets, and help them pass down generational wealth.
HOW DO I BUY LIFE INSURANCE FOR MY CHILDREN?
There are three ways to buy life insurance for children:
- Purchase a new, standalone policy for each child.
- Add a child protection rider to your life insurance policy.
- Purchase supplemental insurance for a child through your employer.
There isn’t a right or wrong way to insure a child; the option you choose depends on your family’s goals and budget. For example, choosing supplemental insurance for a child through your employer might be the most cost-effective option, but depending on the policies your employer offers, it may not offer the living benefits you’re looking for. At the other end of the spectrum, purchasing a standalone policy for a child may be a pricier option, but it will guarantee the most benefits for your child down the road.
Here’s what you need to know about each option.
#1: PURCHASING A NEW, STANDALONE POLICY FOR A CHILD
When we talk about a standalone life insurance policy, we’re talking about whole life insurance. It isn’t possible to buy term life insurance for children. Whole life insurance is guaranteed for life, provided premiums are paid. It’s ideal for creating generational wealth because it guarantees a death benefit will be paid to your children’s children, assuming they are added to the policy as beneficiaries. But the death benefit isn’t the only financial benefit of the policy.
Whole life insurance policies, whether for children or adults, earn a guaranteed rate of return and may earn non-guaranteed dividend payments, which help grow wealth in a built-in savings account called cash value. Cash value can be borrowed tax-free, can act as an emergency savings, helps avoid reliance on banks or third-party lenders, and can be withdrawn from the policy (although gains may be taxed).
Cash value can be accessed by the policyholder (the parent/s) at any time. When a child reaches adulthood, ownership of the policy may be transferred. (Most insurance companies consider a child to be an adult at age 25.) Many families opt to purchase standalone whole life insurance for children inside a life insurance trust. In this case, the trust owns the policy but the family may dictate how funds are to be used. Trusts come with the added benefit of estate tax-exemptions and can also help avoid certain gift taxes.
You can purchase a whole life insurance policy for a child from as young as 15 days old until they reach adulthood, although the earlier you buy, the more favorable insurance rating and premium. On average, premiums for healthy children under age 5 run about $40/month for $100,000 of coverage (for life). Depending on the policy, your child may be able to add more coverage in adulthood without the need for an additional medical exam.
#2: ADDING A CHILD PROTECTION RIDER
A standalone child life insurance policy may offer the most benefits, but for some families it isn’t feasible. Each child needs their own policy, and depending on the size of your family, it may be too expensive. Adding a child protection rider to your own whole life insurance policy is the next best thing.
A child protection rider insures all your children. Not only does this include children you have now, but also any you might have in the future. Once your child reaches adulthood, coverage lapses — meaning they won’t be insured or receive any benefits — but before that happens, you have the option of taking out a whole life insurance policy on your child without a medical exam. This means your child receives the most favorable insurance rating possible.
Child protection riders don’t earn cash value, so unlike a standalone whole life policy, your child won’t inherit a policy with cash accumulated for policy loans/withdrawals/emergency savings built in, but at least they have the option of starting a whole life policy of their own with a low premium.
Child protection riders are typically purchased in $5,000 increments, up to $25,000. If your child otps to purchase a whole life insurance policy as an adult, they can expect anywhere from 3-5 times the amount of coverage that was offered on the rider, without a medical exam. Generally, for each $1,000 of insurance you purchase with a child protection rider, your premium goes up $5, but rates vary between insurance companies. In other words, a $25,000 child protection rider might cost around $125/year. $25,000 in coverage applies for each child covered under the rider.
#3: CHILD LIFE INSURANCE THROUGH AN EMPLOYER
Some employers offer supplemental life insurance for spouses and children, usually at a discounted rate paid by the employee. Whether or not this is an option for your family will depend on your employer, but even if it is offered, it’s important to make sure you understand the policy. What are the benefits? When does coverage terminate? Will your child have the option to purchase a permanent life insurance policy in adulthood without a medical exam? And what happens to the policy if you leave the company?
While a discounted employee rate may seem like a good deal, if the policy isn’t structured to provide benefits to your child in adulthood, it may be a waste of money. The only benefit you may receive is a death benefit should your child pass away. As with all insurance products, educate yourself on what you’re purchasing.
FAMILY WEALTH WITH PARADIGM LIFE
The Wealth Strategists at Paradigm Life are experts at curating life insurance portfolios for families that fit within your budget. Whether you’re interested in pursuing a standalone policy for a child, adding a child protection rider to your policy, or simply want more information about how to grow and protect your family’s wealth, we offer comprehensive financial education and free consultations.
Not only are we passionate about helping your family create generational wealth, we employ the same strategies we recommend in our own homes.