Taking out insurance for your child can bring up uncomfortable feelings, but these policies offer more to parents than financial protection.
There are many reasons why parents may want to take out a life insurance policy for their children and many reasons why they shouldn’t.
Why you Should or Shouldn’t Get Life Insurance for Your Child
It may make sense for your family to insure your children, but it doesn’t make sense for everyone.
Here are three pros and three cons you should consider before getting life insurance:
Pro: Children’s Life Insurance Usually Involves Whole Life Insurance Plans
When it comes to life insurance for children, you’re probably only allowed to take one out under a whole life plan.
That means you’ll have to pay premiums, which take time to grow. While this may be a con for investors, this is a definite pro for people who need affordable life insurance.
After the child turns 18 or 21, your child will take ownership of the policy. Since they’ve had life insurance at such a young age, they’ll pay less on premiums when they get much older.
Con: Children’s Life Insurance Policies Offer a Low Rate of Return
If you’re buying children’s life insurance to build wealth for your kids, you should look elsewhere.
Life insurance isn’t a substitute for a 529 college savings plan because it takes a long time (around 15 years) for the policy owner to reach a cash value that equals the premiums paid.
Families that have the funds to invest in both life insurance and a 529 savings plan can do so. On average, 529 plans offer a 6-8% return, meaning your investment will double in 10 years.
Pro: Children’s Life Insurance Provides Funds and Cash Value
The most obvious reason to get a life insurance policy is to protect your family from possible funeral expenses.
Thankfully, the chances of a child dying are low, but it can happen. If you can’t afford this sudden upfront expense, life insurance is a good option for your family.
At the same time, the life insurance itself can go towards building cash value. Since you’re able to accumulate cash right away, you increase the value of the insurance when it’s needed.
Con: Children’s Life Insurance Has a Low Coverage Limit
While buying life insurance can act as a great barrier between unfortunate circumstances and your wallet, it’s important to note that coverage limits are often low.
Most policies will cover $45,000 to $70,000 on average, which won’t be enough once your child becomes an adult.
To make sure your child gets enough coverage, they have to become the prime insurance holder when they’re older. They also have to continue to take out insurance as they age.
Pro: Children’s Life Insurance Guarantees Insurability Later in Life
If you take out life insurance for your children as early as possible, you are guaranteed insurability later in life, provided they don’t have any pre-existing health conditions.
If they do, you’ll decrease their premiums later on. Either way, it’s a win-win situation for your child’s wallet.
If your child takes up a dangerous hobby, you’re also guaranteeing that insurance brokers will sell a policy to them. That’s great news if your child becomes a cave diver or stunt driver!
Con: Children’s Life Insurance Is a Long-Term, Expensive Commitment
Since life insurance policies for children are whole life plans, you should expect to pay your premiums for decades.
You may not be able to make that commitment, either partially (by making minimum payments) or fully, and it can be expensive to cancel the policy early.
Getting life insurance is a financial-trade off: You’re spending money on their future rather than using that money to pay for their support right now.