When most people think about life insurance, the idea of buying a policy for children never crosses their minds – after all, life insurance is supposed to be for adults – or is it?
These days, more and more people are realizing that buying life insurance for kids can be a sound financial move. Some folks might think that taking out life insurance on a child is distasteful, but the fact is it’s actually all about creating a long-term safety net for their kids – a safety net that can be used to make their children’s and future grandchildren’s lives more comfortable and financially secure.
Benefits of Life Insurance for Kids
A life insurance policy on a child does include a tax-free death benefit, to help with the expenses of an unimaginable loss, just like policies for adults do, but that’s only one of the reasons to purchase this type of insurance.
Life insurance can give your children, grandchildren, nieces or nephews an asset that provides a lifetime of value.
Benefits such as:
- Protection against future uninsurability due to illness or life choices.
- Protection against expensive premiums (monthly payments) due to future illnesses or life choices.
- Predictable premiums that may include the option to be ‘locked in’ at the child’s current age.
- Level premiums – the monthly payments will not go up.
- The ability to increase the coverage later on.
- Optional disability coverage.
- Can’t be cancelled (as long as you keep making payments).
- Readily-accessible, tax-free, money that can be used to pay for a mortgage, student loans, medical expenses and more.
- A stable source of retirement income.
The Top 5 Reasons
Parents Buy Life Insurance for Kids
While each guardian, parent, or loved one has their own unique reasons why they want to buy a life insurance policy for the children in their families, here are the five most common reasons why people are choosing this valuable type of life insurance.
Protects Against Uninsurability and High Premiums
If you are a strong believer in life insurance, buying it for your children when they are young will protect them from insurability issues later.
Life insurance for kids tends to be very easy to get. As people age, medical problems that emerge later in life can make qualifying for coverage difficult.
If your child should get sick later in life, they could be denied life insurance coverage – coverage they need to make sure their own family is financially protected in case they pass away – also coverage that might help with their mortgage, health care costs and more.
Protection Against Future Illness
Does your family have a history of illness such as high blood pressure, diabetes, obesity or cancer? If so, you may want to consider buying life insurance for your child now because if they do develop these conditions and apply for life insurance later on, they might discover they are not even eligible for coverage. And if they do qualify for a policy, the monthly payment will probably be fairly high.
A real-life example
As Karin Miller shares, “When I was pregnant with my daughter, I developed gestational diabetes. The disease stuck around after I gave birth, and it makes new life insurance policies much more expensive for me than before I was diagnosed with the disease. Instead of getting a new life insurance policy, I’m planning to increase the death benefit of the policy my parents bought for me. The premiums will be much cheaper than the high-risk premiums I’d have to pay on a new policy.”
Because her parents had purchased a life insurance policy for her as a child, she was able to add more coverage onto her current policy. This way, she was still able to keep the benefits of the lower rates of her original policy.
Preparing for Their Life Choices
Buying life insurance for your children now doesn’t just cover them against the possibility of a future illness. You will also be protecting their insurability regarding their life choices. Some life choices can lead to very expensive monthly payments or even uninsurability.
Your child may not be able to get insurance later in life if they decide to take up extreme sports. Some examples are: skydiving, scuba diving, skiing, hunting, and commercial fishing and more. Or, your child may not be able to get insurance later in life if they decide to enter a high-risk career. Some of these careers include: truck driving, piloting, mining, logging, construction and more.
On a darker note, lifestyle choices such as drug addiction, will also negatively affect their insurability. Tobacco use of any kind will also make their future life insurance more expensive.
Lock that insurance coverage in!
As long as the monthly premium payments are paid, a life insurance policy taken out on a child can last a lifetime, regardless of their health or life choices.
In addition to guaranteed insurability mentioned above, buying life insurance for kids also guarantees low payments.
As people age, their life insurance premiums increase. The healthier, and younger, a person is, the lower their premiums will be. That’s why buying life insurance for kids when they are little makes a great deal of sense – the low premiums are ‘locked in’ for as long as the policy is maintained.
These ‘locked in’ premiums can help protect against unexpected events in the future such as job loss, economic downturns, or medical problems. When times get tough, the low monthly payment will still be affordable.
Keep making your monthly payments if you want the rates to stay low.
Earning Interest – Borrowing Cash
Another big advantage to life insurance for kids is the fact that the insurance premiums earn interest – interest that can really add up over time. Paying premiums on a life insurance policy for a child is similar to making regular deposits to a savings account. Except unlike a bank account, they will have the added protection that comes along with a life insurance policy.
Once there is cash built up within the policy, it can be borrowed against, tax-free, for any use – to help pay for college tuition, make a down payment on a home, help with medical expenses and more.
If you or your child keeps the policy maintained long enough, they can even draw funds from the policy to help pay for their retirement years!
NOTE: If your goal is only to save for college over the next 18 years, pull cash value out of the life insurance policy when your child starts college, and then stop making payments on the policy, then life insurance is probably not the best savings vehicle for you. In this case a better option would be a 529 college savings account or other options. Definitely check with your trusted financial advisor to learn the best way to achieve your savings goal.
Life insurance can be part of your savings plan for your child, but it is called life insurance for a reason; it’s there to protect life first and foremost and has the additional component of saving.
Giving a Special Gift
A life insurance policy can even be a wonderful gift. Unlike toys or clothes, life insurance for kids really can last a lifetime.
In this case, you can ‘look outside the box’ and buy them a gift that keeps on giving.
A neat way to give this gift is to surprise your child with their life insurance after they are an adult as a Birthday or wedding gift!
Creating a Lasting Legacy
One reason some people choose to purchase life insurance for their child is the ability to start a charity if their child passes away.
It is important to some that they can fund further research on a particular disease or keep their child’s memory alive though a new foundation formed in their child’s honor, much like the Alisa Ann Ruch Burn Foundation.
Kids don’t need life insurance, right?
You may be thinking, “Life insurance is just for people who have a family – people who are married with kids. Life insurance is just to replace a lost income, right?”
Something to think about: Just because your child doesn’t have an income now, doesn’t mean they won’t in the future. Just because they don’t have a spouse or children depending on them now, doesn’t mean they won’t in the future.
There is a strong possibility that your children may have children of their own. They may eventually have people who depend on them financially. By purchasing life insurance for them when they are young, you are basically guaranteeing they will also qualify for and have that life insurance later in life. You will be protecting the financial safety of your future grandchildren.
Coming of Age
Once your child is an adult, you can choose to transfer ownership of the policy to them. This allows them to take full control, choose their own beneficiaries, take cash out or even cancel the policy.
After you transfer ownership, they may choose to stop making payments and let the policy lapse. This usually happens because they are not financially prepared to keep up with the payments or don’t see the value in it, especially when they are only 18! This could be a frustrating situation because you have invested quite a bit to protect their family’s financial future.
One excellent way to avoid this is to plan on continuing to make the payments yourself as a ‘gift’ to your child and child’s family every year. Since you bought the policy when they were very young, the payments should be fairly low. And, since you do not need to transfer ownership of the policy to your child as soon as they turn 18, you can make sure the policy stays active.
Also, depending on how much cash value is in the policy (if it’s a permanent life insurance policy), once they are an adult, they may not even need to make the monthly payments since the policy can make payments to itself.
Combine their insurance with yours!
Did you know you can add your child to your own life insurance policy with a rider? Often this is less expensive than purchasing a separate policy for your child. Later on, that same insurance coverage can be converted to a separate policy for your child.
Don’t have life insurance on yourself yet?
No matter what you decide to do, if you are the main breadwinner of your family, get life insurance for yourself to protect them financially.
Do It for the Right Reason
Carefully think about why you are purchasing life insurance for your child. Is it solely for investment and savings reasons, for future college expenses maybe? If that’s the case, there may be better, investment-only options.
However, if it’s important to you that your child stays insured, no matter what their future health condition or lifestyle choices are, then get the life insurance. You will guarantee their future insurability and provide them with savings at the same time.
Life insurance is a gift that is intangible while they don’t need it – yet invaluable when they do.
- Can you leave your life insurance money to your pet?
- Always tell the truth when you fill out the life insurance application.
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This information is provided for general consumer educational purposes and is not intended to provide legal, tax or investment advice.