Here’s How Much Life Insurance You Really Need
As parents, the absolute last thing we want to consider is something happening to our children. From the time they are born, though, we are encouraged to protect them in as many ways as possible — including buying things like life insurance.
Even the best life insurance companies market coverage designed to protect children, either as a rider on their parents’ policies or as a standalone product until they come of age. But are these coverages really worth buying, and are there better investment alternatives?
Today, we are going to break it all down for you. Let’s get started.
In this article
- 5 reasons people purchase life insurance for children
- Do you need life insurance for your children?
- Alternative investments to consider
- The bottom line
5 reasons people purchase life insurance for children
Before my oldest son was born, I received a pregnancy welcome kit in the mail. It included the usual suspects: advice on everything from swaddling to feeding, coupons for wipes and formula, and a sample of diaper rash ointment. What I didn’t expect to see in that box, though, was an advertisement for Gerber Life, an insurance policy intended for my new baby.
The idea of something happening to my child was — and still is — unfathomable. Sure, my husband and I have life insurance coverage for ourselves, as a way of providing for our loved ones in the event of our deaths. But actually buying a life insurance policy for my child?
As uncomfortable as the thought may be, insurance coverage for children is offered by most major insurers in the country. Parents might consider purchasing one of these policies for their child for a few reasons. They include:
- Premiums that are relatively affordable
- Coverage for final expenses, such as medical bills or a funeral, if something were to happen
- A cash value that can act as a savings vehicle for things like future college expenses
- Insurability protection for your child
- The option for lifelong coverage with certain policies
Let’s talk a bit about each of these reasons and whether the arguments are compelling enough for you to actually purchase life insurance for your child.
1. Low premiums
Life insurance for children is not offered as a standalone term insurance product. If you want to purchase a policy for your child, as opposed to adding a child rider to your own term policy, you’ll need to buy permanent life insurance coverage.
As far as whole life insurance goes, though, child policies are actually pretty affordable. Because you can get a low premium for the duration of the coverage — and that coverage can follow your child for life — it may seem well worth the expense.
For instance, I was quoted premiums just over $3/month with Gerber Life if I wanted to protect a new baby today. I could get $15,000 in lifelong protection for about 32 cents a day, which would be more than enough to cover average final expenses.
Considering that a typical whole life policy for an adult can easily cost thousands per year in premiums, paying a few cents a day to protect your child may feel like a bargain.
2. It provides coverage for final expenses
The primary reason you would buy life insurance coverage for yourself or your spouse is to protect your life insurance beneficiary. You may plan for your death benefit to replace your lost income, pay off your debts, or even provide for your children’s future college expenses.
None of these things apply for your child’s life insurance policy, of course. If they were to die, though, there is one big bill that would be left behind: his or her final expenses.
Right now, the median funeral cost is just over $7,600 — a significant expense for any mourning family, especially if the death was unexpected. And Although no parent wants to consider this possibility, a life insurance policy can offer a safety net in a worst-case scenario.
3. It’s an additional savings vehicle for things like college expenses
Perhaps one of the most oft-touted reasons for buying life insurance for children is that it can serve as a savings vehicle.
As a permanent product, these child life insurance policies offer both a death benefit and an accrued cash value component. The cash value builds bit-by-bit with each monthly payment, stashing away a percentage of your premiums in a savings account of sorts, which can be drawn from later on.
Your child can choose to pull from their policy’s cash value to cover future expenses, such as pricey college tuition or a down payment on a home. This policy provides a savings vehicle that is also a safety net — though it probably shouldn’t be your primary college savings account (more on that later), it can be beneficial if both are important to you.
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4. It helps protect their insurability
As an adult, being approved for life insurance coverage will often hinge on personal factors such as health, existing medical conditions, and even occupation. By buying life insurance for your children now — before any injuries, major illnesses, or health issues appear — you are able to protect their insurability for decades to come.
With whole life coverage, your child can keep the cash value and death benefit of their policy once they come of age, even if they have developed medical concerns that would preclude them from buying new, affordable life insurance. In many cases, your child can even choose to increase their coverage amount, regardless of their health or occupation at the time.
5. Policies can be paid in full early to provide lifelong protection
Many insurers offer a specific payment timeline for your child’s insurance policy. By opting for a 5-, 10-, or 20-year payment option, it can be easy to pay off your child’s coverage in full long before they assume ownership of the policy.
This means that once they turn 21, they can then take over an insurance policy that may provide death benefits and a cash value for the rest of their life — without ever burdening them with premiums.
Do you need life insurance for your children?
With all of these benefits, you might think that buying a life insurance policy for your children is a no-brainer. But that’s not necessarily the case. In fact, for many families, the cost of coverage may significantly outweigh the benefits.
Life insurance may not be the right choice for you and your kids for a few important reasons:
- It’s not necessary. As parents, we buy life insurance to provide for our families. If something happens to us and our contributions to the home are suddenly lost, a death benefit can keep our family afloat. Because your child does not contribute to the family in a financial capacity, however, life insurance on them is more want than need.
- There are better savings options. Although your child’s life insurance policy will accrue a growing cash value, the returns are often subpar (averaging as low as 1.5% for whole life policies) — combine that with maintenance and management fees, and the return on investment may be much less than you could get elsewhere.
- Contributions aren’t optional. If you’re using life insurance as a savings vehicle for future expenses, it’s important to remember that monthly premiums won’t be optional. Although you could always pause contributions to a college fund if you suffered a financial setback, you can’t miss premium payments without risking the entire insurance policy.
Alternative investments to consider
If you appreciate the benefits that child life insurance policies can offer but aren’t sure they’re right for your family, don’t fret. Here are some other options that may be a better choice for you and your children.
1. Look into a 529 plan
Sponsored by individual states, 529 plans are tax-advantaged college savings vehicles. There are two types of 529 plans, education savings plans and prepaid tuition plans. Although both types aren’t available in every U.S. state, every state and the District of Columbia participate in at least one.
Many states offer tax deductions for your 529 plan contributions, and the earnings on those contributions grow tax-free when used toward qualifying higher education expenses. These funds will play into your child’s financial aid calculations, whereas 529 savings will not, so be sure to keep that in mind.
2. Add a child rider to your policy
Rather than purchase a standalone insurance policy for your child, see whether your existing policy allows for the addition of a child rider. This can be an affordable way to provide for final expenses if something were to happen, utilizing the life insurance you already own.
3. Direct those funds toward other savings vehicles
Statistically speaking, the odds of a child dying before age 18 are quite low. Rather than pay premiums for a life insurance policy each month while your child is young — even if that policy accrues a cash value — consider directing your money toward another savings vehicle.
Roth IRAs, CDs, and even high-yield savings accounts are all good ways to save for your child’s future when — and how — you are able. Each will allow your savings to grow while also offering you the flexibility to use those funds as you need.
The bottom line
As a parent, you will do everything possible to both protect your kids and plan for their futures. For some families, this may mean that child life insurance is worth it, as it can act as both a safety net and a savings vehicle for future expenses.
Although it’s relatively affordable, life insurance for children may not be the right place to focus your efforts. Instead, consider whether it would be better to utilize a 529 plan or high-yield savings account, which can offer higher returns and/or tax-advantaged growth on the savings. And if you still want the safety net of life insurance coverage on your children, see about adding a child rider to your own policy.
No matter which option you choose, protecting your family means having the insurance coverage you need for yourself first and foremost. Many top life insurance companies offer affordable coverage that you can buy entirely online in just minutes, immediately offering your children an extra layer of financial protection.
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- Leave your family up to $1,500,000 in life insurance
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