What Is Life Insurance for Kids?
Life insurance for kids is a type of policy designed for children under age 18. Unlike life insurance for adults, which often helps replace income, children’s life insurance serves a different purpose.
These policies are typically whole life insurance, which provides lifelong coverage and includes a cash value component. The cash value can grow over time with tax advantages and may be accessed later in life. Unlike term life insurance, which ends after a set period, whole life insurance for children stays in place for life.
A parent, grandparent, or legal guardian usually buys the policy and acts as the policy owner until the child becomes an adult, often around age 21. At that time, ownership can transfer to the child.
Most policies for children offer smaller death benefits, often between $10,000 and $50,000. Monthly premiums typically range from $10 to $30, depending on the coverage amount.1
Pros: Benefits of Life Insurance for Kids
Children's life insurance offers several advantages beyond the standard death benefit. Understanding these benefits can help you decide if this type of policy fits your family's needs.
Guaranteed Future Insurability
Guaranteed insurability is a key reason some parents consider life insurance for children. When you buy a policy while your child is young and healthy, you secure their ability to keep coverage even if their health changes later in life.
Many children's policies include guaranteed purchase options. These allow the insured to buy more coverage at certain ages without proving insurability. This can be helpful if your child develops a health condition that could make it harder to qualify for coverage later.
Cash Value Accumulation
Whole life insurance for kids provides a death benefit and builds tax-deferred cash value over time. This cash value can be borrowed or withdrawn for future needs. However, loans or withdrawals may reduce the death benefit and affect the policy’s long-term value.
Loans and withdrawals may create an income tax liability, reduce the account value and death benefit, and may cause the policy to lapse. Loans also accrue interest. Tax-free treatment applies if the policy is not a Modified Endowment Contract (MEC), withdrawals do not exceed the cost basis, and the policy does not lapse.
Cash value may take years to accumulate unless a large premium is paid up front.
Locked-In Low Premiums
Premiums for whole life insurance policies stay fixed when purchased early. Payments are often lower compared to policies purchased later in life. However, regular premium payments are required to keep the policy active.
Funeral Expense Protection
Life insurance can help cover end-of-life expenses. The death benefit can pay for funeral costs and medical bills, allowing families to focus on grieving instead of added expenses.
Cons: Drawbacks of Life Insurance for Kids
While there are benefits, life insurance for children may not be the right choice for every family. It is important to weigh the following drawbacks before making a decision.
Opportunity Cost
Money used for life insurance premiums could be directed toward other savings options, such as 529 college savings plans. These accounts are designed for education expenses and may offer stronger growth potential for that goal.
Limited Need for a Death Benefit
Children usually do not have income or dependents. Because of this, the main purpose of life insurance, income replacement, may not apply, making the coverage less necessary than it is for adults.
Potential for Lapsed Coverage
If premium payments are missed, the policy could lapse. This may result in lost coverage and the loss of benefits built over time, including guaranteed insurability.
Types of Life Insurance for Children
When considering life insurance options for kids, you'll encounter several different types of policies. Understanding the distinctions helps determine which might best suit your family's needs.
Whole Life Insurance for Children
Whole life insurance is a type of permanent life insurance that represents the most common type of juvenile life insurance. These policies offer:
- Permanent coverage that never expires for their entire lifetime
- Fixed premiums that never increase
- Guaranteed cash value growth
- Fixed death benefit
Many parents and grandparents favor whole life insurance for its predictability and simplicity. Once purchased, the coverage terms remain constant throughout the child's entire life.
Child Riders on Parent Policies
Instead of buying separate policies, parents can add children to their adult policy through child life insurance riders. These riders typically offer around $10,000 in term coverage for a minimal additional premium.
Key characteristics of child riders include:
- Lower cost than standalone policies
- Coverage for multiple children under one rider
- Term coverage that expires when the child reaches adulthood
- No cash value component
- No guaranteed insurability options
While more cost-efficient, riders don't offer the long-term benefits of dedicated children's whole life policies.
Gerber Life Insurance Company Grow-Up Plan
The Gerber Life Insurance Company Grow-Up Plan deserves specific mention as one of the most well-known child life insurance policies. This whole life policy doubles its face value when the child turns 18, with no premium increase. The policy can be transferred to the child's ownership at age 21.1
When Life Insurance for Kids Makes Sense
While not essential for every family, children's life insurance makes particularly good sense in certain situations:
- Desire for a Financial Head Start: Some families view whole life insurance as a way to provide long-term financial flexibility for their child’s future.
- Specific Estate Planning Needs: Juvenile life insurance can be useful in estate planning for wealthy families to address future estate tax liabilities or to balance inheritances among children.
- Family History of Medical Conditions: Securing guaranteed insurability early is invaluable if your family history includes genetic disorders, hereditary diseases, or chronic conditions. Conditions like diabetes, heart disease, or certain cancers may complicate obtaining life insurance later in life.
- Protection for Family Businesses: Juvenile life insurance can be integral to a family business succession plan, offering liquidity and ensuring generational business continuity.
How to Choose the Right Policy
When selecting life insurance for a child, consider these factors:
- Coverage Amount: Most experts suggest modest coverage amounts for children, usually ranging from $25,000 to $50,000. Although some companies provide higher amounts, keep in mind that the primary advantages are in the guaranteed insurability and cash value components, rather than the death benefit coverage.
- Premium Payments: Select a premium payment plan that you can sustain with confidence over the long-term. Failing to make payments may lead to a lapsed policy, jeopardizing your investment and forfeiting valuable benefits.
- Policy Features: Look for policies that offer guaranteed purchase options for additional coverage without proof of insurability, cash value growth guarantees, policy ownership transfer options when a child reaches adulthood, and a premium waiver in case the policyholder becomes disabled.
- Company Financial Strength: Since children's life insurance represents a decades-long commitment, choose financially strong insurance companies with proven longevity. Check ratings from independent agencies like A.M. Best, Moody's, and Standard & Poor's.
- Policy Conversion Options: Some policies offer advantageous conversion options, allowing transition to permanent coverage or increased death benefits at specific milestones without additional underwriting.
How to Purchase Life Insurance for Kids
The process of obtaining juvenile life insurance typically follows these steps:
- Research providers specializing in children's coverage.
- Gather basic information including the child's name, date of birth, and Social Security number.
- Complete an application with parental/guardian consent.
- Answer health questions (most juvenile policies require limited health information rather than full medical exams).
- Select coverage amount and riders.
- Set up a premium payment method.
- Review and sign policy documents.
Most juvenile life insurance applications process quickly, often providing coverage within days of application.
Final Thoughts
Life insurance for kids can serve as a long-term financial tool that combines protection with value growth over time. It may offer advantages for those concerned about future insurability or who want to provide a flexible financial asset for their child’s adulthood.
Before purchasing a policy, review your overall finances and focus on building emergency savings and securing enough coverage for income-earning adults first. If those priorities are in place, a modest whole life insurance policy for your child may support their long-term financial goals.
Source
- Gerber Life Insurance Company Grow-Up Plan - Gerber Life Insurance Company. https://www.gerberlife.com/child-life-insurance/grow-up-plan.
