The Pros and Cons of Life Insurance for Children

Written by Rob Pinner

Should you own life insurance on your children?  That’s a question we get a lot, and there really is no wrong answer.  I can see both sides of the argument regarding it’s a value to your child.

Life insurance is heavily marketed to grandparents for 3 reasons:

  • To save money
  • Lock in a low rate
  • To protect the child’s insurability (this allows them to buy life insurance without having to pass an exam).

The parents of children, while not as much as the grandparents, are often marketed also.  These reasons are usually given.

  • All the Above ↑
  • Burial Insurance
  • College Tuition
  • Retirement Income

These reasons are why some agents recommend purchasing life insurance on your children, but many advisors recommend being cautious.

Insurance agents and financial advisors have come to the agreement that there are more important financial plans that need to be made before considering life insurance on your child.  Those include:

  • Emergency Savings Fund
  • Life & Disability Insurance on you (the parents)
  • Your child’s college savings
  • Your retirement savings

How to buy

Here are a couple of ways to buy life insurance on your child:

  • You can add a child to your existing life insurance policy. You do this by adding a child rider. The amounts you can purchase range between $5K-$25K and varies by life insurance carrier.  These riders usually expire when your child turns 25, but most will allow you to convert to a permanent policy before the expiration.  Stand-alone term is not available for children.
  • Your next option is to buy a permanent policy on your child. These include whole life and universal life as options.  This coverage will last your child’s entire life and build up cash value. It will be more expensive than child term rider.

Most life insurance carriers will allow you to buy a permanent policy on your child.  As the parent or grandparent, you would be the owner and beneficiary of the policy until your child reaches adulthood. Gerber Life is the best known for child life insurance policies but be weary, they tend to be high.

According to a survey by LIMRA, about 20% of parents or grandparents have life insurance on their children and grandchildren.

Reasons to buy- or not

Below is the pros and cons of buying life insurance on your child or grandchild.

Lump sum of money for funeral expenses

Pros: If your child does pass away, a life insurance policy could help with funeral expenses and medical bills.  Also, could provide money for counseling and  household bills if the parents have to miss work.

Cons: Although unlikely, there is a risk of a child dying.  With funerals averaging over $10K, most families don’t have the savings if this were to occur.  Just take a look at how many GoFundMe pages have been set up to cover an unexpected death.

Locks in your child’s insurability

Pros: There does lie a chance that your child may not qualify for life insurance when they are older.  Reasons for this could be a medical problem as a child, bad driving record, or even a criminal record.  Buying life insurance on your child would eliminate this from happening and guarantee they had life insurance as an adult.

Cons: Analysts say that most 20-30-year old’s have no problem qualifying for life insurance.  This is reason not to buy a child policy. Also, the guaranteed insurability option is tied to amount of the child rider which is usually minuscule compared to what an adult with a family would need.

Use as a College Savings/Retirement Savings

Pros: The cash value of permanent life insurance policies grow tax free while accumulating.  If done properly they can also be withdrawn tax-free.  This requires that you always keep your policy in-force.  If your policy lapses and you have withdrawn money, it could have tax implications. The cash value can be used for anything, like college or down payment on a house.

Cons: This is a little tricky.  There is no way possible to save enough money for your child’s college (Not enough time). The cash value of permanent policies usually has fees associated which drives down the rate of return. These policies also are a bit pricey.

Final Thought

Always make sure to look at your financial situation first before purchasing a policy on your child.  It is more important for you as the parent to be properly covered.  Always team up with an experienced agent who can get you multiple quotes and help guide through the process.

Rob Pinner
Rob Pinner

I have been a licensed insurance agent for over 15 years.  If you have any questions or comments please don’t hesitate to give us a call.

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