While the benefits of life insurance for parents are clear, the pros and cons of taking out life insurance for your children are a different matter. Whether you should buy life insurance for your children depends on many factors.
Read on to learn more about the kinds of insurance and whether an insurance policy for your children is the right move.
Life Insurance for Children vs. Adults
Life insurance is usually purchased as either a salary replacement (so that a spouse or children aren’t left unable to maintain their standard of living) and/or a tool to pay for funeral expenses. In the case of a child, there is no salary to replace. With the absence of a child, living expenses for the family actually drop, meaning it is possible for a family to cover funeral expenses through savings or loan payments without cutting significantly into household expenses.
If you are working paycheck to paycheck, life insurance for children is typically low cost and may be a consideration. It is important to consider the cost of an accident and the associated medical bills that you may have to pay out of pocket for your child. If you don’t have a medical insurance plan that will cover the bulk of an emergency issue, then life insurance can offer a bit of relief from the expense.
There is also a smaller concern of the ability to pay for a child’s funeral and end-of-life expenses if the worst were to happen. For some families, there is adequate money in the emergency fund to pay such costs. For other families, however, such funds aren’t easily available for various reasons. That usually means debt. If you are not good at saving money, this can be a relatively inexpensive way to have the money you need if it came down to it.
Life Insurance Approval for Children
The biggest issue is the possibility of illnesses developing late in childhood or in adulthood that could prevent your child from being eligible for life insurance.
While there are some insurance policies that will offer a small sum, up to $10,000 or so, and don’t ask questions, larger dollar value plans may require a medical examination. If you have a child with a congenital condition or a life-threatening illness that is diagnosed before you get insurance, it may be very difficult or expensive to obtain.
The question to ask yourself if you have a child with an illness or chronic condition is whether the price of monthly premium payments on this insurance is more or less than the sum you will receive if you lose your child. Insurance agencies tend to calculate this to work in their favor. The sooner you lose a loved one, the more the cost becomes a windfall compared to money spent. Of course, since losing a child is a worst-case scenario, this never feels like a winning proposition.
Whole vs. Term Life Insurance
Life insurance comes in two categories: whole and term. The difference is similar to choosing between renting an apartment and buying a home or condo. Term life insurance is less expensive than whole life insurance, but it is like renting a home. Once the payments stop, you have nothing to claim. Whole life insurance is significantly more expensive, but it also works more like an investment account. Many will purchase the policy with a large lump sum and will use the insurance company to hold on to the investment for them. If a large down payment is made, you may not even need to make monthly payments. Like term life insurance, the money that is claimed if something happens to your child is significantly greater than the money invested.
The money from a whole life insurance plan can be cashed out with gained interest at any time. If you have a sum of money at the time of the birth of a child, it may be a smart investment to place this money in the care of an insurance company. This works similarly to a 529 plan. If something happens to your child, it can become a life insurance payout. If your child grows happily into adulthood, it can blossom into a healthy college fund.
Cost by Age
As an adult, the cost of insurance will increase based on the age range you fall into. This is because there is a greater likelihood of passing away during each decade of your life. Children remain in a low-risk bracket for death. Because of this, most insurance companies have the same price for an insurance policy for children of any age from birth to 18.
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