Life Insurance on Children: Yes or No?

Is life insurance for children a smart purchase? Or is it a stereotypical, commission–based hard sell?

Parents faced with the decision of whether or not to make the purchase must remember that every situation is unique. All families and needs differ. The life insurance marketplace is vast–filled with potential solutions for almost every family imaginable. This is why contacting an independent agent to help you find what's best for your family is always recommended.

Should you buy a life insurance policy for your child?
Common arguments for include time and insurability. Most children obviously have a much longer life expectancy than adults, resulting in very low premium costs. Parents can purchase much greater amounts for relatively little cost that the child can carry with them well into their adult years, depending on the policy.

Life insurance products that provide an investment element, such as variable life or universal life, can accumulate significant cash value as the child ages.

When it comes to life insurance coverage, insurability also is extremely important. A child who develops a significant illness at an early age, such as leukemia or diabetes, will have a more difficult time obtaining coverage in the future.

Guaranteed insurability
Parents who buy coverage on children should consider purchasing guaranteed insurability coverage. This will give the child options to purchase additional coverage in the future without having to prove insurability (i.e. submit to a medical exam).

Alternatives to insurance
Common arguments against coverage for kids are that infant death is extremely rare. In addition, children are not typically wage earners, thus defeating one major purpose of life insurance: replacing lost income.

Some experts argue that parents more interested in the investment element of a life insurance policy can find better returns elsewhere, such as IRA or 529 plans. All experts agree that parents must first make sure they are adequately insured before considering coverage on a child.

How much should you buy?
Determining appropriate coverage limits for any life insurance policy can be complex and should always be discussed with a professional prior to purchase.

If you choose to purchase insurance on your child, the easy answer is the more, the better. Healthy children are extremely insurable; therefore, high coverage amounts can often be obtained for very little premium cost.

Many will choose only to insure for expenses such as funeral costs. Others want to leave the child with an adequate base to develop in the future. This is a personal decision with which a parent must feel comfortable.

Other considerations
State law and insurance company underwriting usually determine how old a child must be before a policy can be purchased for them. Often, the mark is set at a number of days (not years) old, such as 16. Insurability may increase at later intervals, such as six months or one year old.

A child probably should not be named as a primary beneficiary to any life insurance policy. The reason is that courts will not distribute large sums of money to a child. Parents are often advised to set up a trust for the child and name the trust as beneficiary. Through the trust, parents can determine important issues such as guardianship and benefit payment.

As noted, several types of life insurance policies couple a death benefit with savings/investment elements to create cash value. Such policies may include investment options, risk variations, and tax implications that all should be discussed with a professional before purchase. The good news is that there are many choices in the marketplace. A professional also will introduce savings or protection alternatives that may be more beneficial to your family's needs.

Reference: www.iii.org

Back to Newsletter Home