Does it make sense to buy life insurance for children? Whether you are a parent or grandparent, you might wrestle with this question and need some advice. In this article, we will look at the pros and cons of buying life insurance policies for children. If you have read some articles with conflicting opinions, that’s not surprising. Extreme viewpoints on this topic abound. Hopefully, the expert advice in this article will help you make an informed decision.
Life Insurance for Children a Good Idea? Absolutely Not!
Well, before you get the idea that we’re completely opposed to life insurance for kids, we are not. There isn’t an absolute answer to this question. However, we’ll look at this statement and see when it does make sense to say “absolutely not”!
Some folks adamantly proclaim it’s not a good idea to buy life insurance for your kids. We agree…in the following situations:
The Emotional Sales Pitch
If you are tempted by an emotional advertisement or sales pitch, then keep reading.
Securing adequate life and disability insurance on yourself – as the parent – is of primary importance. Providing financial protection for your children in the event of your premature death or disability should always come first. So, if you haven’t done this first, then say no to life insurance for your kids.
It’s never a good idea to be swayed by an emotional pitch, especially when it comes to a purchase such as life insurance.
Grandparents want to buy policies before asking parents.
If you’re a grandparent and want to do something special for your kids and grandchildren, then maybe you should reconsider too.
Perhaps your parents bought a whole life policy for you as a child and you want to do the same for your grandkids. Maybe your children would welcome your financial gift, but would much rather you contribute to a college savings fund, such as a 529 Plan.
Thinking you are securing your children’s future.
If an insurance agent or financial advisor tells you that purchasing a whole life policy is the best financial move for your kids, then keep looking for advice.
It’s important to look at other ways investment options for your kids. If your advisor recommends whole life as the ultimate solution, then you might want to ask about other options. As mentioned above, a college savings account or another investment could be a much better use of your money…and provide better help to your children in the long run.
We know that most financial gurus such as Suze Orman and Dave Ramsey would agree with this wholeheartedly. However, lest you think we’re completely on board with Ramsey, please check out our article here.
We’ll cover more about Ramsey’s opinion on life insurance for children below.
Life Insurance for Children a Good Idea? Absolutely!
We think there are certain situations where life insurance for children is absolutely a good idea. However, we will mostly look at life insurance for kids in the form of a rider on your policy.
Life Insurance Rider, especially with lots of kids.
Most life insurance companies charge the same premium to add a children’s life insurance rider to your policy regardless of how many children you have. A typical children’s rider will cost less than $70 per year for $10,000 of coverage for all the children in your household. It makes a lot of sense to buy a life insurance rider if you have more than three children.
Emergency Fund is Low.
Oftentimes, new parents receive very good advice: Buy life insurance. However, many new parents are stretched financially and haven’t built up an adequate emergency fund. So, if a child tragically dies, then there would be a financial burden of paying for final expenses. It can make financially prudent to carry a child(ren) life insurance rider until an emergency account is properly funded.
There are legitimate reasons to buy life insurance for children based on their health. Keep in mind, life insurance is medically underwritten, for adults and children — even many child(ren) life riders. So, a child with a serious medical issue could be declined.
There are situations when a parent has good reasons to believe there is high probability of their child developing serious health conditions. It’s possible due to genetics or a minor pre-existing health condition.
KEY: Some carriers offer riders that do not require medical underwriting, so the coverage is guaranteed.
In cases like these, it could be a smart move for a parent to purchase a low-cost policy. When their child reaches adulthood, he or she could then have the option of taking over the premium payments.
Grandparents want to buy policies after asking parents.
In situations where parents have sufficient life insurance and have taken all the right steps to fund college saving accounts (if desired), then there is nothing wrong with a grandparent or relative buying a children’s life insurance policy.
Usually, a whole-life policy makes sense. This would allow the policy to build cash-value and provide permanent protection. A “paid up” policy would be a great gift. That’s a type of policy that the grandparent would completely pay, so the grandchild wouldn’t have to worry about making premium payments.
Caution: It’s important to make sure parents and grandparents are on the same page regarding the policy owner, premium payer, beneficiaries, and access to cash-value accumulation. In the event of a divorce, a grandparent (as the owner) could make policy changes that are against the wishes of their former child in-law. We have seen this happen and it’s not desirable.
More on Children’s Life Insurance Riders
If you are shopping for term insurance and know that you want a children’s life insurance rider, don’t assume they are all the same. Not only does the cost vary, but some carriers allow you to buy higher face amounts.
An important consideration is whether or not the carrier allows the child’s term policy to be converted to another term or permanent policy when they reach a certain age, usually between 18 and 23. This feature could be very consequential if your child has health concerns.
Carriers usually limit the amount that can be converted to permanent insurance without medical underwriting.
You don’t have to keep the rider.
Let’s say you purchase a 20-year term policy with a children life rider when your kids are very young. 10 years later, your financial situation could be a lot different and it might be wise to drop the coverage.
This is the approach Dave Ramsey used. He dropped the children’s life rider after he and his wife had built up their emergency fund.
TIP: Don’t simply put your policies on autopilot, but review your policies (including riders and beneficiaries) every few years.
Life Insurance for Children – Good Idea? – Conclusion
Hopefully, we have demonstrated that there isn’t one right answer to this question. Depending on your situation, it might be a good idea or not. Just don’t be swayed by the Gerber Life commercials and think that “every good parent buys life insurance for their children”. That’s simply not so.
Also, don’t listen to some of the “financial experts” who say this is never a good move.
There are compelling reasons why a parent or grandparent would purchase this type of policy. If you would like a term quote that includes a child life insurance rider, please call us or complete the quote request form on this page.