When it comes to purchasing life insurance for children, opinions are divided. Some parents see it as a valuable financial tool that can help secure their child's future, while others argue that it's an unnecessary expense. Understanding the pros and cons of buying life insurance for children is crucial, especially when weighing the costs, benefits, and alternative savings options.
Why Do Parents Consider Buying Life Insurance for Children?
Parents often seek life insurance for their children for several reasons. A primary motivation is to ensure their child's insurability into adulthood. If a child is covered by a life insurance policy early in life, they may not have to worry about being denied coverage due to future health conditions. Additionally, some view life insurance as part of a broader savings strategy, believing that the policy's cash value accumulation will provide a financial cushion down the road.
There are also those who purchase life insurance for children as a means of covering funeral expenses in the unfortunate event of a child’s death. This is typically achieved through term life insurance or a child term rider added to the parent's existing policy. These policies are generally less expensive, and the coverage typically provides a benefit large enough to cover funeral costs.
Types of Life Insurance for Children: Term vs. Permanent
When considering life insurance for children, it's important to understand the two primary types of policies: term life insurance and permanent life insurance.
Term Life Insurance for Children:
Lower Costs: Term policies are much cheaper than permanent policies and provide coverage for a specified period (e.g., until the child reaches adulthood).
Limited Benefits: The benefits are often modest, usually only enough to cover funeral costs. These policies do not accumulate cash value, which means they serve as temporary protection rather than a financial asset.
Appropriate Use: If your primary goal is to protect against funeral costs or provide a basic safety net, a child term rider or a standalone term life insurance policy may be suitable.
Permanent Life Insurance for Children:
Higher Costs: Permanent life insurance, such as whole life or universal life insurance, is significantly more expensive than term policies. These policies also offer the potential to accumulate cash value, which can be borrowed against in the future.
Cash Value Component: The cash value growth within a permanent policy is often slower and may not outperform other investment options in the long term. However, it can act as a forced savings plan.
Considerations: While permanent life insurance offers lifelong coverage, the high premiums and low returns may not justify the expense, especially when compared to other financial tools like college savings accounts.
Alternatives to Life Insurance for Children
Rather than opting for permanent life insurance, there are other financial strategies that might be better suited for saving for your child's future. For instance, 529 college savings plans or custodial accounts provide tax advantages and greater flexibility for saving for education costs. These options typically offer higher returns compared to permanent life insurance and are more aligned with your goal of funding your child’s future needs.
Additionally, some parents choose to invest in traditional savings accounts, mutual funds, or stocks to build wealth for their children. These alternatives offer better growth potential and allow for easier access to the funds when needed.
The Role of Child Term Riders
A child term rider is another option for parents who want to add coverage for their children under their own life insurance policy. These riders are typically low-cost and provide limited coverage, usually enough to cover funeral expenses. This may be an attractive option for those who already have a life insurance policy in place and want a straightforward, inexpensive way to provide some coverage for their children.
Is Life Insurance for Children Worth It?
The decision to buy life insurance for a child depends on your financial goals and priorities. Here are some things to consider:
Financial Priorities: If you want to provide for your child’s future, alternative savings vehicles like 529 plans, custodial accounts, or simple investment accounts may be better options than life insurance.
Cost vs. Benefit: While life insurance may seem like a good financial tool, the high administrative costs and limited investment options often make it a poor choice compared to other savings methods.
Education and Financial Literacy: Life insurance can be an opportunity to teach your children about the importance of financial planning. However, it may be more effective to start teaching them financial literacy through more transparent and flexible investment tools.
Should You Buy Life Insurance for Your Child?
In summary, buying life insurance for children is a decision that requires careful consideration. Term life insurance might be appropriate for providing minimal coverage, while permanent life insurance offers lifelong coverage and a cash value component, but often at a high cost. However, the long-term value of permanent life insurance for children may not be as significant as other investment alternatives, especially when it comes to saving for education or long-term financial goals.
Before making a decision, consider your financial goals, explore alternative savings and investment options, and consult with a financial advisor to ensure that you're choosing the best strategy for your child's future.