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 costs six to ten times more compared to term life insurance. Even though child policies are generally small — we’re talking around $25,000 to $150,000 of coverage — the cost-per-benefit amount is still high,so it’s far from cost-effective.

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

• Why people buy life insurance for children
• How people buy life insurance for children
• Is life insurance for children a worthwhile investment?
• Do you need to protect your child’s insurability?
• Alternatives to child life insurance

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 children's whole life insurance for the child. 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 life insurance for children a worthwhile investment?

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 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.

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 ineffective use of your money.

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."

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).

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 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 your questions and find the help you need.

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 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.