Most people know they need the protection of life insurance during their working years, but did you know some parents buy life insurance for their children, too? While some buy life insurance for kids for financial protection or a lifelong savings vehicle, others purchase it as a long-term hedge against the unknown.
When it comes to buying life insurance for kids, you’ll find a lot of conflicting – and even misleading – advice. Some experts even say buying life insurance for kids isn’t the best use of your money.
John Luongo, New York-based insurance agent and owner of Shop Around Insurance, falls into that camp – at least part of the time. While it’s crucial that primary earners and caregivers are covered, he says, life insurance isn’t really a necessity for kids because they aren’t earning anything, have no dependents or liabilities, and have only a very small chance of passing away.
What Types of Life Insurance are Available for Kids?
Whether you’re buying life insurance for kids or adults, the scope and selection of policies is similar. On one hand, there are term policies that last for a predetermined length of time and end once that time is up. Since term policies are typically the cheapest life insurance option, they’re extremely popular for adults purchasing life insurance during their working years.
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Beyond term, you’ve got permanent life insurance, commonly called “whole life.” These policies vary in their terms and benefits, but almost always last a lifetime and build cash value you can tap into or borrow against — this is more often the type of life insurance parents buy for their kids. Within the realm of whole life insurance, there are several different types to consider as well – each with their own take on benefits, payment options, and cash value.
Parents purchasing life insurance for kids almost always invest in whole life policies, Luongo says, noting that term policies don’t make a ton of sense when it comes to kids’ life insurance.
“I myself wouldn’t want to write term life on kids, as there isn’t much of a point to it. Term life covers your earning years,” he says.
Parents who want to purchase life insurance for kids should have the long view in mind, says Luongo. “You want a permanent plan where you can earn some interest – one that will be available to them in later years,” he says.
Why Parents Purchase Life Insurance for Children
Where adults typically need life insurance to cover lost wages and funeral expenses should something happen to them, most people purchase life insurance for kids as a life-long “investment” instead.
The reasoning behind this? According to Luongo, buying permanent life insurance for kids is one way to lock in a certain premium for life. Unlike term life insurance, which expires once the term (usually 10 to 30 years) is over, permanent life insurance can last a lifetime as long as the premium is paid.
“Life insurance gets more expensive with age, so locking in a premium when they are young is not a bad idea, and a nice gift to be able to turn over to your kids when they reach an age where they can pay it themselves,” he explained. “Certain plans earn interest over time so there may be some ‘cash’ in the policy that could be loaned against or even cashed out.”
While Luongo wouldn’t necessarily recommend buying permanent life insurance for those reasons, those are the perks that draw people in, he says.
Another reason buying life insurance for kids is fairly common: When you buy permanent insurance for children, you ensure they’ll have an active policy when they get older. If their health precludes them from buying their own life insurance policy down the line, they’ll be able to keep the policy you bought for them as long as they keep paying the premiums.
What Should Parents Look for When Buying Life Insurance for Children?
Parents hoping to buy a new plan for kids should take stock of their goals and find a life insurance policy that provides the coverage they want and need. Meanwhile, adults should always make sure they are adequately covered before seeking out or applying for a life insurance policy for their children. Luongo says many companies may not even be willing to write policies on children until their parents first have enough life insurance to cover their family’s needs.
When purchasing a policy for a child, do your due diligence as if you were buying your own policy. The first step is making sure you understand the type of life insurance you’re buying, the coverage it offers, and how the policy might change over time. And if you’re unhappy with the terms of a policy you’re considering, keep looking. As with life insurance for adults, there are all kinds of policies out there that can help you meet your individual needs and financial goals.
If you’re buying whole life, you also need to know what you can look forward to as your child reaches adulthood, says Luongo. That way, you can plan accordingly.
“When the kid turns 18, does the policy change to that age and rate, or does it stay as it was issued?” asks Luongo. While changes to a policy aren’t necessarily a bad thing, you should know how everything will shake out before you buy.
What Parents Should Watch Out For
While life insurance proponents may be quick to sell you on the upside of buying life insurance for yourself and your children, it’s important not to play to your emotions. Remember, the most expensive policies aren’t always the best – and there is such a thing as buying “too much coverage.”
Parents purchasing whole life for the kids should do more than avoid over-buying, however; they also need to know their policy inside and out. It’s a lifetime investment, after all, and one that could play a big part in their child’s financial security over time.
At the same time, it’s important to note that whole life isn’t the only option out there. If a parent’s main concern is buying life insurance to cover the unthinkable, they can consider a cheaper, term policy that will provide coverage for a set number of years. Just because it doesn’t make sense for most people doesn’t mean it isn’t the right move for some.
Meanwhile, it also pays to think outside of the box. Shoppers should consider all of their options available and how they might meet their needs – even if those needs are unorthodox.
“There are companies that will even write renewable one-year term policies on minors,” says Luongo. “The premium will increase every year with these, but it’s guaranteed to renew without more medical reports or exams.”
Avoiding “gotchas” and hard sells is the most important thing to remember for parents navigating through all their options. No matter what, parents should read all of the fine print and know their policy inside and out.
And they should ask questions – lots of questions. If they cannot get the answers they need from the life insurance provider they’re considering, they should take that as a sign it’s time to buy from someone else.
The Bottom Line
As parents, we want to protect our children in any way we possibly can. We want to provide for them, shelter them from danger, and help them become the best partners and people they can be. Normally, that means opening up some type of savings account for our children, teaching them financial basics, and helping them avoid some of life’s pitfalls and obvious mistakes. But most of all, it means setting up our children for a better and more prosperous life than we have had – and our parents had before us.
While buying life insurance for children isn’t always a necessity, it can’t really hurt, either. The main factor to consider is opportunity cost – as in, what else could you be doing with that money?
Instead of buying life insurance for your kids, you might be able to pay down debts and improve your own financial situation, save for your children’s college education, or save for any number of financial goals that could improve all of your lives over time. The choice is yours. As always, make sure any decision you make is an informed one.