Child term life insurance riders may rank low on your list of financial priorities (maybe you’ve never even heard of them), but there are several reasons why insuring your children makes sense. In fact, children’s life insurance can be an affordable way to give your kids a head start at a wealthier, more financially secure future. But how does a child term life insurance rider work? And is it really more affordable than buying your child their own policy?
In this article, we’ll compare child term life insurance riders and children’s whole life insurance policies and explain the benefits each. Plus, find out how to use life insurance to help your kids pay for school, put a downpayment on their first home, start their own business, fund retirement, and lock in affordable insurance coverage for life.
CHILD TERM LIFE INSURANCE RIDER
When you buy an insurance policy, your insurance agent will present you with options called “riders” that allow you to customize your policy. Life insurance riders are supplemental insurance that provide additional coverage—sometimes at no extra cost, sometimes at a reduced cost compared to a separate policy. You can tailor your policy with riders for disability, long-term care, your spouse, and your children, just to name a few.
A child term life insurance rider adds coverage for your children for a predetermined amount of time—usually until age 21-25. If your child passes away before they reach adulthood, the insurance company pays out a death benefit. This is often used to pay for burial/funeral expenses or to allow parents to take time off work to mourn the loss of a child.
Because it essentially functions as burial insurance, coverage amounts for child term life insurance riders tend to be small, which means premiums are low—often around $5/year for every $10,000 of coverage.
Adding a child rider to your own policy is the most affordable way to provide coverage for kids. However, because the likelihood of your child passing away before they reach adulthood is low, odds are you’ll pay premiums for your rider and never see any of that money back from your insurance company.
So even though a child term life insurance rider is affordable, a stand-alone child whole life insurance policy may be a better value. Keep reading to see why…
CHILD WHOLE LIFE INSURANCE
Whole life insurance policies for kids tend to be more common than child term life insurance riders for several reasons:
- Coverage is permanent and lasts for the child’s whole life, provided premiums are paid.
- Premiums are locked in for life, so your child will retain affordable coverage into adulthood, even if they develop a health condition or choose a risky career that would otherwise prevent them from being insured.
- Once your child reaches adulthood, the policy can be transferred to them. They can also choose to add additional coverage at their current rate, without the need for a medical exam.
- Whole life insurance comes with a built in investment component called cash value, which grows tax-deferred and can be borrowed tax-free at a favorable interest rate as a low-cost alternative to student loans, mortgages, or business loans and can even be used as income in retirement.
- Whole life insurance earns a guaranteed rate of return, plus non-guaranteed dividends, and is protected from market volatility.
- If your child no longer wishes to be insured, the policy can be surrendered in exchange for a payout from the insurance company, minus any applicable surrender charges.
The cost of whole life insurance for children depends on three factors:
- Their age at the time of insurance underwriting.
- The amount of coverage purchased.
- The length of time premiums will be paid.
The younger your child is, the better premium rate you’ll receive. This premium is locked in for life, but you can choose whether you want premiums to be equally spread out over the lifetime of the policy (around 100 years), paid until your child reaches retirement, or paid up by the time your child reaches adulthood. The longer the payment period, the less expensive each annual premium will be, but some parents prefer a policy to be completely paid up before they transfer it to their child.
Regardless of the payment option you choose, buying a whole life insurance policy for a child is always more cost effective than if your child were to wait until adulthood to buy their own whole life policy—often to the tune of tens of thousands of dollars. In fact, premiums for whole life insurance on a newborn are about a third of the cost of premiums for whole life insurance on a 30-year old, amounting to massive savings over the lifetime of the policy.
The value of whole life insurance for children goes beyond the premium savings. Because premiums are so low, more of the funds paid into the policy go into the tax-advantaged cash value account. And because this investment feature has more time to compound wealth, compared to waiting until adulthood to purchase a policy, it will build more wealth over the lifetime of your child.
WHICH TO CHOOSE?
If the sole purpose of insuring your child is to cover unexpected funeral costs, a child term life insurance rider is an affordable option to provide peace of mind. However, if you’re looking for a way to help pass down tax-advantaged generational wealth and set your child up for a more secure financial future, whole life insurance is a safe and proven wealth strategy.
Alternatively, there is a third option. You may purchase a child term life insurance rider on your own insurance policy that can be converted into whole life insurance when your child reaches adulthood. The downside is that the rider doesn’t have cash value, so your child will miss out on several years of investment growth associated with a whole life policy, but once it’s converted it will start earning cash value. This option has the benefit of being inexpensive during childhood but still offers guaranteed insurability once children reach adulthood.
Keep in mind that the coverage provided with a child term life insurance rider likely won’t be sufficient once your child has a family of their own, but they will have the option of purchasing additional coverage.
HOW TO BUY LIFE INSURANCE FOR CHILDREN
If children’s life insurance makes sense for your family, there are few things to know before you buy.
First, make sure you have sufficient life insurance coverage on yourself. It’s more important for you to be insured than your children, because if something were to happen to you and their premiums could no longer be paid, all insurance would terminate.
Second, make sure you have an emergency savings account with a minimum 6-24 months of living expenses. If you have your own whole life insurance policy, the cash value of your policy may act as your financial foundation, provided you have sufficient cash value to replace 6-24 months of income. Also make sure you’re on track to have sufficient retirement income and consolidate high-interest debt.
Third, know your financial goals. If you’re planning on using the cash value of a child’s whole life insurance policy to fund college education, carefully examine your policy illustration with your insurance agent and make sure your policy is structured for sufficient growth to accomplish this goal by the time your child reaches university. The same goes for real estate down payments and retirement funding. In some cases, it may be strategic to utilize a 529 college savings plan or IRA.
Fourth, teach your children to be financially responsible. If they will be transferred ownership of their life insurance policy in adulthood, they need to know how to fund and utilize their policy efficiently so they don’t lapse and can maximize wealth.
Fifth, consider an irrevocable life insurance trust (ILIT). When purchasing multiple insurance policies for a family, a trust can offer additional tax advantages and provide more structure in how generational wealth is used and passed down.
When you’re ready to insure a child, it’s best to work with an independent insurance agent like the Wealth Strategists at Paradigm Life. We work with the nation’s top-rated mutual insurance companies to help you find the best child whole life insurance policy or child term life insurance rider for your budget, and we’re not incentivized to represent any one insurance company over another. We are dedicated to the financial wellbeing of your family, regardless of which stage of life you’re in. Our consultations are always free—schedule yours today.
CHILD LIFE INSURANCE FAQs
Q. Who can buy life insurance for a child?
Anyone with insurable interest can buy life insurance for a child. Most often, a parent, grandparent, or legal guardian can purchase a child whole life insurance policy. However, only parents or legal guardians can add a child term life insurance rider onto their own policy (not grandparents).
Q. Who is the beneficiary of a child life insurance policy?
The beneficiary is usually the person who purchases the policy or policy rider. Once a policy is transferred to a child in adulthood, they can change the beneficiary to anyone they choose.
Q. Will my child need a medical exam to qualify for insurance?
In most cases, a medical exam is not required to insure a child. However, you may be required to fill out a medical questionnaire as part of the application process. This is typically done electronically.
Q. Is my child too old to insure?
Most insurance companies cap children’s policies at age 18. You can insure a child as young as 15 days old, which offers the most favorable premium rates.
Q. What if I have multiple children to insure?
If you opt for a child term life insurance rider, you typically pay a flat-rate fee to insure all your children, and each may have the option of converting to a permanent whole life insurance policy once they reach adulthood. If a child passes away before adulthood, the death benefit applies to each insured child. If you choose stand-alone child whole life insurance policies, each policy is paid for separately.
Q. What if I have a child term life insurance rider and then I have more kids?
A child term life insurance rider is usually added to an adult policy at time of issue. Because the rider covers all children born to or adopted by the policyholder, additional children are automatically covered.
Q. If I already have life insurance, is it too late to add a child term life insurance rider?
It depends on your insurance company. Speak with your insurance agent or Wealth Strategist to see if a child term life insurance rider is still an option for you.
Q. If my child converts their term life insurance rider to whole life insurance, will they need a medical exam?
Most child term life insurance riders allow the insured to increase coverage up to 5X the face value of the rider without a medical exam. Additional coverage beyond what is outlined in the policy rider may require your child to complete a medical exam.
Q. My child was born with a disability; can I still get insurance coverage?
Underwriting requirements vary by insurer, but it is possible to find coverage for a child regardless of a pre-existing condition. Schedule a free consultation with a Wealth Strategist; we can help you find an insurance option that fits your needs.