Should you buy life insurance for children?

In most cases, it’s not recommended you buy life insurance for children. Life insurance primarily helps dependents cover the bills when a breadwinner dies. Assuming no one depends on them financially, your children don’t need coverage.

While it’s true that life insurance rates go up as you age, it’s unlikely that your child will get priced out of or denied a policy as an adult. Life insurance for children is usually whole life insurance, which is 5 to 15 times more expensive than term life insurance, and costly to maintain over your child’s lifetime.

How does life insurance for children work?

Life insurance for children works much like life insurance for adults: The policyholder pays premiums and the policy pays out to a beneficiary (in this case, a parent or guardian) if the insured passes away while the policy is active. Because most life insurance for kids is whole life, this coverage lasts their entire life.

Most child policies, like Gerber Life Insurance, are marketed as financial tools that serve as an investment for educational expenses, lock in affordable premiums for your child, protect your child’s insurability, and cover funeral expenses if your child passes away. 

However, these policies:

• Don’t offer competitive rates compared to term life insurance 

• Aren’t necessary to guarantee insurability for your child

• Come with high administrative fees and low rates of return

• May not accumulate enough cash value by the time you need the funds

You can provide better protection for your child by having your own life insurance policy that pays out to a guardian — minors can’t accept life insurance payouts — to support their needs should you pass away.

Who needs child life insurance?

You don’t need to protect your child’s insurability unless you have a family history of serious medical conditions that develop early in life. As for locking in premiums, most adults have no issue securing affordable life insurance in their 20s and 30s.

If you need to insure your child’s life, it's simpler and cheaper to add a child rider to your term life insurance policy. You may also choose this option to cover funeral costs if the unthinkable happens.

A child rider provides a death benefit if any of your children pass away without the complex investing component, and can be converted to a permanent policy in the future if your child needs lifelong coverage. 

A child rider is more affordable than a full child life insurance policy. It usually costs about $5 per year for every $1,000 worth of coverage. So, you might pay $50 more per year for a $10,000 child rider.

Is children’s life insurance a good investment?

Short answer: no. Permanent life insurance has a cash value component that grows over time. The cash value is why insurance companies pitch life insurance for kids as a savings vehicle for your child’s future. 

But life insurance for children isn’t a smart investment. The cash value earns interest at a rate set by your provider, often with a guaranteed minimum.  However, whole life has higher fees and less growth than you’d get from a standalone investment account.

“A lot of life insurance agents sell child policies as a great ‘investment’ or perfect place to save money for education costs in the future. However, these policies should never be used as a primary source of college savings/funding,“ says Patrick Hanzel, certified financial planner and Advanced Planning Team Lead at Policygenius. “The policies take many years to accumulate value, and oftentimes won't even have broken even (when cash value available for loan is greater than total premiums paid) by the time the funds are needed.“

Child life insurance policies are often sold as a great ‘investment’, but they shouldn't be used as a primary source of college savings.

- Patrick Hanzel, certified financial planner and Advanced Planning Team Lead

Alternatives to child life insurance

If you’re looking for a way to save for your child’s future college or nest egg, these alternatives to children's life insurance give you more bang for your buck:

• 529 plan: These plans are exclusively for higher education expenses and qualified withdrawals are tax-free.

• IRA: If your child earns money, manage an IRA savings account for them and match their earnings to jump-start retirement savings.

• Custodial account: Parents can save and invest in a custodial account to build savings for their child and hand the account off to them when they turn 18 or 21.

If you’re looking to save for your child’s future, a life insurance plan isn’t the best way to invest. To protect your children financially, it’s more important to have your own life insurance policy so that the proceeds can provide for them if you pass away.