A lot of parents are interested in purchasing life insurance for their children for two primary reasons: 1) they’re told it’s a good investment vehicle and 2) it protects their child’s insurability in the event that they may not be able to purchase life insurance in the future.
But here’s something that most traditional agents won’t tell you: child life insurance is a bad investment, and in the vast majority of cases, you don’t need to protect your child’s insurability.
Let’s break down the reasons why child life insurance is unnecessary and a bad idea:
Child life insurance is not a good investment vehicle
Child life insurance products are a type of whole life insurance specifically designed to cover children. Whole life insurance products have a savings component in addition to the life insurance component. This savings component is referred to as the "cash value," and is designed to grow over time.
Let’s look at an example child life insurance policy. One popular type of child insurance is the Gerber Life College Plan, which guarantees a payout of between $10,000 and $150,000 when the policy (and your child) reaches maturity.
That’s a pretty big range — $150,000 could cover a nice private school, but $10,000 would barely buy books.
Despite the fact that child life insurance products (and, more broadly, whole life insurance products) promise a guaranteed growth, that guaranteed growth is pretty small. Companies like Gerber Life usually hide this by offering large growth rates to start with, then gradually reduce the growth rate down to the minimum guaranteed growth rate.
What's the alternative?
Most people looking for an investment vehicle for their kids are thinking about college savings, and the biggest bang for your buck when it comes to that is the 529 college savings plan. The 529 college savings plan is, hands down, our favorite way to save for college. It has a number of advantages over child life insurance policies:
Growth is tax free (if you use the money on qualified education expenses)
Fees are usually lower than child life insurance
Better for your financial aid application
You may be able to deduct contributions on state taxes
You can adjust your plan to fit your tolerance for risk
There are a number of other ways that you can save for college that are better than child life insurance. Check them out in our guide to saving for college.
You probably don’t need to protect your child’s insurability
Child life insurance policies are useful in one, very specific case: if you know your child has a medical condition that will make it difficult for them to buy life insurance as an adult, you should buy child life insurance for them now. Child life insurance doesn’t end when they turn 18 — they can keep it throughout their adulthood, despite their medical condition.
A lot of parents see advice like that and think, "Oh, I should get life insurance for my child just in case they develop a medical condition later in life." Nope! You’re wasting money on something that, quite frankly, probably isn’t going to happen.
Even if it does happen, if they’re a still a child, you can buy child life insurance and protect their insurability. So let’s get one thing straight: unless you know, 100%, that your child has a disease that will make it difficult for them to buy life insurance as an adult, do not buy child life insurance in an attempt to protect their insurability.
What's the alternative?
While there’s no straight alternative to child life insurance when it comes to protecting insurability, there is an alternative when it comes to protecting your finances if they pass away before reaching maturity. Lots of parents like the peace of mind that, in the event that their child dies, they can afford a proper funeral and time to take off work to grieve.
The best way to do this is to buy a child rider on your own term life insurance policy. Child riders are cheap — you can buy a unit of $1000 worth of coverage for about $5 per year. And child riders cover all of your children — unlike child life insurance, which requires an individual policy for each child.
Image: Myles Tan