Should you buy life insurance for children?

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 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 a commercial or two for, is whole life insurance. Whole policies are a lot more expensive than comparable term insurance. Child policies are generally small — we’re talking around $25,000 to $150,000 of coverage — so the monthly premium won’t necessarily represent a huge expense. But it also shouldn’t be a priority as you budget for the costs of having a kid.

Let’s dive deeper though. In this article, we’ll discuss:

• Why people buy life insurance for kids
• How people buy life insurance for children
• Do you need to protect your child’s insurability?
• Is it good to invest in life insurance for children?
• Alternatives to child life insurance

Why people buy life insurance for kids

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

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

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 ensure a child in two ways.

1. They can purchase children's whole life insurance for the child. This policy pays out a death benefit — a lump sum of money — in the event of a worst-case scenario.
2. They can add a child rider to their own term life insurance policy.

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. Your child’s policy won’t lapse when they turn 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. Moreover, you can buy child life insurance to protect their insurability, were they to develop a medical condition while under 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, insurance agent or insurance broker about what might be the best options for your family.

Is it good to invest in life insurance for children?

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 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 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.

Take a look at this chart of a sample whole life policy that pays dividends and offers a guaranteed minimum cash value. It comes from a thread on Reddit with a user asking if whole life insurance is a good investment for his children. (For the record, the other users agree it’s a terrible idea.) The user points out that at year 19 – around when his child will be going to college or otherwise starting his adult life – the cash value is greater than the premiums paid.

That means he’s making a profit, right?

Not exactly. That’s the potential cash value. The other column is the guaranteed cash value, which is half of the premium payments. In fact, the guaranteed cash value isn’t greater than the paid premiums until year 57! That’s a terrible return and a terrible use of your money.

When you invest money normally, you choose what you do with it. You can take it to a fund manager who doles out high fees, or take it to a place like Vanguard and invest it in a low-fee index fund. You can choose what types of funds you invest it 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 insurance life policy (with expensive coverage) and a half-baked investment vehicle (with high fees and low growth).

Alternatives to child life insurance

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

• 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.
• If your child is old enough to be earning money, maybe with an after-school or summer job, you can manage an IRA for them and match their earnings with contributions, giving them a head start on retirement.
• 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 turns 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. If you're thinking about buying life insurance, we can help you quickly compare life insurance quotes.