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Should you buy life insurance for children?

Life insurance for children is unnecessary since you don't rely on them financially, but alternative financial vehicles like 529 plans should be considered.

Jeanine SkowronskiPat Hanzel

Jeanine Skowronski & Patrick Hanzel

Published July 24, 2020

KEY TAKEAWAYS

  • Life insurance is meant to be used as income replacement

  • Most policies for children are more expensive whole life insurance

  • Consider alternative savings vehicles to prepare for your child's future

In most cases, it’s not recommended you buy life insurance for children. Life insurance is, first and foremost, financial protection. It helps dependents cover the bills when a breadwinner dies. Your child isn’t making a salary. No one is depending on them financially in a worst-case scenario.

While it’s true that life insurance rates go up as a person ages, the odds of your child getting priced out of or denied a policy when they actually need one are slim.

On top of that, most life insurance for children, like the Gerber Life Insurance you’ve probably seen advertised on TV, is whole life insurance. If you compare term vs whole life insurance, whole life insurance rates are five to 15 times more than term life insurance. Even though children's policies are generally small — we’re talking around a $25,000 to $150,000 coverage amount — the cost-per-benefit amount is still high,so it’s far from cost-effective.

Why people buy life insurance for children

Life insurance for children is generally marketed as a financial tool that:

  • Serves as an investment or savings vehicle for the child’s future expenses, like college
  • Covers funeral expenses in the event of the child’s death
  • Locks in affordable premiums at a young age
  • Protects your child’s insurability

However, unless your child has a medical condition, these policies are generally not a sound investment (more on why in a minute).

How people buy life insurance for children

Child life insurance is sold by most major insurance companies and there are a few, like the aforementioned Gerber Life Insurance, that specialize in the product. Parents can insure a child in two ways.

  • They can purchase a children's life insurance policy. This policy pays out a death benefit in the event of a worst-case scenario.

  • They can add a child rider to their own term life insurance policy.

Is children’s life insurance a good investment?

Short answer: no. Permanent life insurance policies – universal, whole and variable – have a cash value. That is, you get life insurance with a death benefit, but part of your premium payments also fund a cash account that, in theory, should grow in value over time. That’s why some parents find life insurance for their children appealing. They get protection and interest-earning savings at the same time.

But life insurance for children isn’t a good investment vehicle. Depending on the kind of whole life insurance policy you buy, the cash portion earns interest from the life insurance company's investments, or at a predetermined rate set by the company or, in some cases, from dividends of the company's annual profit. Some whole life policies guarantee a minimum cash value, while other types don't.

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According to the policy:

Take a look at the graphs below of a sample whole life insurance policy with a base coverage amount of $50,000. This policy has a guaranteed insurability rider, pays dividends and offers a guaranteed minimum cash value. It comes from MassMutual, one of the top life insurance companies, and demonstrates why a children's life insurance policy might not be the best investment.

Example policy for one year old female child

YearsAge end yearAnnual dividendCash value of additionsTotal cash valuePaid-up additionsTotal death benefitTotal paid-up insurance
1210101018950189189
2311212140450404403
3413353564150641641
4516525292750927927
5618721421242512422433
6723983101616516165115
78291304912071520717809
893316868425775257710473
9103721288931265312613097
101143264110837425374215717
111254328134644835448318378
121367408160753625536221117
131478502188963445634423891
141590611219374365743626704
1516103737251886455864532325
1617109874285898826114037762
171811510213213111406240740412
181912011793587124076367343031

Example policy for one year old male child

YearsAge end yearAnnual dividendCash value of additionsTotal cash valuePaid-up additionsTotal death benefitTotal paid-up insurance
1216161625950,259259
2319353557050,570569
3423595992050,920920
45268888130951,3091308
5629120201173251,7322891
6736161413223852,2385731
7843210641280752,8078559
8948267641342953,42911,355
91055333884411354,11314,128
1011624081420485554.85516,900
1112795021723575655,75619,737
1213956162053679956,79922,647
13141127522412798557.98525,616
14151289082797929459,29428,621
1516146108832081073859,29431,673
1617154128136351220860,73834,650
1718163128140751370962,20837,576
1819175148745371527563,70940,493

Methodology: Quotes based on policies offered by Policygenius in 2020.

This policy costs $318.50 if you pay your premiums annually, and $27.71 monthly ($332.52 yearly total). Once the cash value exceeds the premiums paid, you'd making a profit, right?

Not exactly. That’s the potential cash value column. The guaranteed cash value can be a lot lower, and in fact, you could end up putting more into the policy than your children woould get out. Children's life insurance policies can have a very low return and can be an ineffective use of your money.

According to a Policygenius’ Certified Financial Planner:

As Patrick Hanzel, Policygenius’ Advanced Planning Specialist and Certified Financial Planner explains, “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. These 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."

quote

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, Advanced Planning Specialist and Certified Financial Planner

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How does the investment part work?

When you invest money normally, you choose what you do with it. You can work with a fund manager or take it to a company like Vanguard and invest it in a low-fee index fund. You can choose what types of funds you invest in.

With whole life insurance, administrative costs are almost always higher than what you’d pay at a financial institution, and you have no control over where you’re putting your money. Plus, you’ll likely average a higher rate of return investing that money on your own than in a whole life insurance policy.

So while it seems like you’re killing two birds with one stone – insuring your child and investing – it’s more like you’re getting an unnecessary life insurance policy (with expensive coverage) and a half-baked investment vehicle (with high fees and low growth).

What is a better option?

If you need to insure your child’s life, we suggest doing so by adding a child rider to your term life insurance policy. A child rider provides a death benefit if one of your children passes away. A single rider generally covers all of them and the add-on is pretty cheap. You can buy a unit of $1,000 worth of coverage for about $5 per year.

Do you need to protect your child’s insurability?

Probably not, unless your child has a medical condition that will make it harder for them to get life insurance when they’re an adult. In that case, your child’s policy won’t lapse when the child reaches 18 or 21 — they get to keep it. So, in this instance, you are guaranteeing they have some life insurance coverage when they’re older.

It’s natural for parents to worry a healthy child will develop a medical condition before they reach adulthood but, unless you have a family history of debilitating genetic conditions that develop early in life, it’s highly unlikely they will. However, you can buy life insurance for children to protect their insurability, were they to develop a medical condition under the age of 18.

As for locking in premiums, most adults have no issue securing affordable life insurance when they purchase a policy in their 20s and early 30s.

Having said all that, you can talk to a financial planner or one of Policygenius’ insurance agents to get answers to any further questions you may have and find the help you need.

Alternatives to child life insurance

As for college savings and future nest eggs, these alternatives to children's life insurance give you more bang for your buck.

  • A 529 plan: If a child education plan is what you’re concerned about, consider a 529 plan. They’re made exclusively for higher education costs and have some nifty tax benefits.
  • Open an IRA for them: If your child is old enough to be earning money, maybe with an after-school or summer job, you can manage an IRA savings account for them and match their earnings with contributions, giving them a head start on retirement.
  • Open a custodial account: If you’re concerned about them getting a head start on saving in general, open a custodial account for them. You can invest like you normally would, and hand the account off to them when they turn 18 or 21.

Remember, it’s more important to make your child the beneficiary on your life insurance policy than to buy them one of their own.

Head of Content at Policygenius

Jeanine Skowronski

Head of Content at Policygenius

Jeanine Skowronski is the head of content at Policygenius in New York City. Her work has been featured in The Wall Street Journal, American Banker Magazine, Newsweek, Business Insider, Yahoo Finance, MSN, CNBC and more. She has also appeared as an analyst on Good Morning America, The Willis Report, ABC World News with David Muir, NPR’s Marketplace and other local television and radio stations.

CERTIFIED FINANCIAL PLANNER™ & Advanced Planning Specialist

Patrick Hanzel

CERTIFIED FINANCIAL PLANNER™ & Advanced Planning Specialist

Patrick Hanzel is a CERTIFIED FINANCIAL PLANNER™ on the advanced planning team at Policygenius. He has eight years of industry experience and previously worked as an advisor and associate at Northwestern Mutual. He has a degree in Business Administration from Nebraska Wesleyan University, where he was also a member of the golf team.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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