We know it’s hard to think about your child’s death; after all, every parent hopes their children will have a long, healthy life. So, it’s understandable if buying life insurance for your kids doesn’t seem like a priority. However, as a parent you have to constantly prepare for the unexpected. Buying life insurance is typically a smart financial move, but is it necessary for a child?
What is Child Life Insurance
Child life insurance can be bought by a parent, guardian, or grandparent to protect the child’s or guardian’s financial security. Child life insurance works the same as adult life insurance. You pay a premium and when the covered person passes their beneficiaries receive a payout. However, coverage options for kids are much more limited than they are for adults. Adults can choose from a variety of plans including term, whole, universal etc. Child life insurance policies only come as a whole life policy. Meaning as long as you keep up on the premiums the policy will last for the child’s entire life. Having a whole life policy also means the premiums are fixed so they will never go up.
There is also the added benefit of a cash value with a whole life policy. This is the savings component of a life insurance policy where a portion of the premium is set aside and earns interest over time. However, for child life insurance the coverage amount is typically under $50,000. Once your child is a certain age, typically between 18-21, they can take over the policy for themselves. And decide if they want to keep it, increase their coverage, or drop it completely. So essentially you’re giving your child a head start on protecting their own families when they eventually pass.
Child Rider Vs. Child Life Insurance
Child life insurance and child riders are often confused, but they are not the same. With child life insurance it’s a separate contract that covers the risk of death of a child. When the child passes the family receives a death benefit. Child riders are add-ons that you can choose to add to your own life insurance. They are tied to a parent’s policy rather than being a standalone policy. If a child on a child-rider dies, you get a small payout. If all you’re looking for is peace of mind in case the worst happens, a child rider may be a better choice than a child life insurance policy on its own. Child riders offer:
- Straightforward protection – A child rider gives security for your child without the complicated investing part of a child policy.
- Conversion options – If your child needs coverage for the rest of his or her life, you can change a child rider into a permanent insurance in the future.
- Affordability – A child rider costs significantly less than a full life insurance policy for a child. Every $1,000 of coverage typically costs about $5 per year. So, a $10,000 child rider might cost you $50 more per year.
Benefits of Child Life Insurance
If you’re debating whether or not to buy a policy for your child and aren’t sure what to look for, here are some of the benefits of a policy.
- Future insurability – Most child life insurance policies come with or offer a guaranteed purchase option. That means the child can buy additional coverage once they are an adult without having to take a medical exam. This can be especially helpful if your child gets a long-term illness like diabetes or decides to have a dangerous career. Most people with health problems or hazardous jobs have to pay a lot more for life insurance than the average person.
- Savings – You can take money out of the cash value account or take out a loan from it. Then your child turns 18, they have the option to drop the policy and receive the full cash value. The money can help for things like college tuition, a car, or down payments on their first home. The account is also tax-deferred if you don’t have to pay taxes on the interest until the money is taken out.
- Worst case scenario coverage – Losing a child is very painful, and leads you to having unexpected costs in your worst moment. As long as the premiums are paid the policy will pay out a lump sum if it happens. The money can be used to cover things like a funeral or grief counseling. It can also help cover your bills so you can take off work while you’re grieving.
Disadvantages of Child Life Insurance
Generally, they are not a smart financial investment. While in the benefits list we mentioned insurance companies sell life insurance for kids as a way to save for your child’s future with the cash value, these types of policies can have higher fees and less growth than a separate investing account. We also noted that since rates go up as you get older, getting a policy when your child is young can give them coverage when they are older. Even though life insurance rates do go up between 4.5% and 9% every year, it’s rare that a child won’t be able to get a cheap policy as a young adult. The only time this isn’t true is if your child has a disability or illness that will last their whole life and make it hard for them to get cheap term life insurance when they’re older.
Another benefit is that a full policy for a child is a great investment, but this is sometimes not the case. Even though the cash value of a whole policy makes interest at a rate set by your insurance company, often with a guaranteed minimum, it is too expensive for the average person to buy a whole policy. This is because whole life insurance costs a lot more than term insurance. Over the course of your child’s life, you may not be able to keep paying those fees. Whether or not you should get child life insurance entirely depends on your family’s specific situation. Where one child may benefit because they have a chronic illness, another might not actually get too much from it because they’re healthy and able to get a completely affordable plan as a young adult.
Do I Need Child Life Insurance?
Before you buy coverage for your kids, you should look at your budget and think about your own life insurance needs. In general, your own life insurance is more important than your child’s because it can help pay for your family’s living costs or other costs if you die. Here are times when getting a policy for your child might be a good idea:
- Your child makes a lot of money as an actor, model, or social media star.
- Your teenager is working part-time to help pay for things around the house.
- Your child takes care of their younger siblings and gives you the kind of help you would have to hire someone else to do otherwise.
Beyond that, you don’t need to protect your child’s ability to get insurance unless you have a family background of serious health problems that start young or a child with a disability. When it comes to locking in premiums, most adults in their 20s and 30s don’t have any trouble getting reasonable coverage. If you need to protect your child’s life, it’s easier and less expensive to add a child rider to your term policy. Riders are add-ons that can give your policy extra coverage. You could also choose this choice if you want to pay for a funeral in case the worst happens.
Don’t worry if you’re not sure about child life insurance or if you decide it’s not for you. There is still a way to protect your child’s financial future and help them get off to a good start when they become adults. Savings plans are a more straightforward option for saving money for your kids. You can put the money you would have spent on the life insurance into traditional savings accounts, such as:
- 529 savings plan – These plans are tax-advantaged accounts offered by the government. There are two kinds of 529 accounts: prepaid tuition plans and educational savings plans. Both can only be used to pay for higher education costs, and qualifying withdrawals are tax-free.
- Custodial accounts – Parents can save and invest in a custodial account kept in the name of their child, such as a UTMA (Uniform Transfers to Minors Act) or UGMA (Universal Gifts to Minors Act) account, to build up savings for their child. Parents or guardians take care of custodial accounts and give them to the child when they turn 18 or 21.
- IRA – If your child works and makes money, you can set up an IRA savings account for them and match their earnings to get them started for retirement savings.
Let EZ Help
Since child life insurance is so dependent on your circumstances your best bet is to speak with an agent. Everyone has their own needs, goals, and ways they can spend their money. At EZ.Insure, we know that you and your family want the best protection, but we also know you have to stay within your means. So, we will do everything we can to help you decide as well as find you the best policy at the best price.
We want to make it as easy as possible for you to do so! We’re here to help, and the best part is that everything we do is free. We will help you with everything, from answering all of your questions to helping you choose a policy and finish the registration process. We will also help you after your plan has begun. To get started, just type your zip code into the bar below or give us a call at 877-670-3560.