Buying Life Insurance on Your Children

If you’re a parent, owning a life insurance policy on yourself is essential to ensure your children could be properly taken care of even if you died. This makes sense.

So, why would your child need life insurance?

While your children don’t contribute to your household income, there are other reasons you may want to consider buying life insurance on your child.

Recouping Financial Loss

Losing one’s child is something you wouldn’t wish on anyone. It’s devastating. When you first think of the situation though, your mind goes to emotional loss and not financial.

But consider the financial effects as well:

• Final expenses – Funerals can easily top $10,000 once everything is said and done. Can you quickly come up with the funds for this if the unthinkable were to happen?
• Time off work – If one’s child died it’s a clear assumption that they would need some time off work. No one knows how long the grieving period may take. Would you have the ability to get back to work on your own terms, or would you need to go back for financial reasons?
• Counseling – I don’t think there’s a comparable grief to that of a parent who loses a child. Many times the parents will need counseling. Does your health insurance cover this? If not, would you be prepared to pay out-of-pocket?
• Memory – When a child dies, sometimes parents and loved ones want to create a memorial or charity to honor the child’s memory.

Life insurance ensures that the parents would have the money to pay for a beautiful funeral, take the needed time off of work, go to counseling if they wish, and create a lasting memory in their child’s honor.

Future Insurability

The second reason to buy life insurance on your child is to lock in their future insurability. When one applies for life insurance as an adult, many things come into play as the application goes through life insurance underwriting:

• Age – The older you are, the more expensive your life insurance premiums will be.
• Medical conditions – If you have a medical condition, diabetes for example, chances are your premiums are going to be higher to balance out the risk. Certain health conditions may even deem you to be uninsurable.
• Drug, alcohol, or tobacco use – If you have had a history of excessive alcohol use, you will find premiums to be raised. If you use tobacco, this also plays into higher premiums. Marijuana users can find life insurance but premiums may be raised, hard drug users will be uninsurable.
• Occupation and hobbies – Sometimes even your job or extra-curricular hobbies can affect your life insurance rates. A professional scuba diver will typically have higher premiums than a schoolteacher.
• Family history – As life goes on, medical conditions can develop not only for you but for your immediate family members as well. Life insurance companies take your family history into consideration when reviewing your application.

Term life insurance is not available as a standalone policy on children (because the term would likely be over by the time they needed income replacement for their own families), but a permanent policy will last their lifetime so long as the premiums are paid.

If you purchase a permanent life insurance policy on your child before all these factors even come into play, they will never have to worry about having increased rates or having their application denied based off of one of the factors stated above. Purchasing a child rider can accomplish this too because of the ability to convert it into a permanent policy. We’ll get into child riders a bit later.

Cash Value Accumulation

The third reason you may want to consider buying life insurance on your child is that fact that a permanent policy can be an attractive means of accumulation. The cash value inside the policy grows tax-deferred and death claims will be paid out tax-free in most cases.

Though life insurance is not an investment product, life insurance companies invest the premiums you pay and, in the same way other invested monies go, the longer it sits the more it generates. Buying a permanent policy on your child while they’re young will allow the cash value to accumulate into a substantial amount.

When your child is of mature age, you can transfer ownership as well. At this time they may be planning to have a family of their own and can name their spouse and children the beneficiaries of this well-aged policy. Certain policies also allow your child to purchase additional life insurance on top of what you bought, no matter their health status.

Permanent policies, whether it’s a whole life or universal life policy, are much more complicated than term life policies. Depending on the type of policy, you can use the dividends to pay down the policy’s premiums, you can withdraw funds, or you can take out a loan against the policy. These options have certain consequences that come into play so it’s important to work closely with your life insurance agent if you plan on purchasing a permanent policy for your child to make sure you understand the ins and outs of your particular policy.

Cash Value Life Insurance Is Excluded from Financial Aid Formula

When your child applies for college financial aid, items like checking and savings accounts, stocks, bonds, 529 Savings plans, and a few other assets are included when calculating how much financial aid he or she can qualify for. These are called assessable assets. The more assessable assets you have, the more money you are expected to contribute to college costs.

Cash value life insurance, however, is a non-assessable asset. This means that its value is not included when determining financial aid. The are four main types of non-assessable assets:

• Retirement accounts (e.g. IRAs, 401(k)s)
• Home equity in a primary residence
• Annuities
• Cash value life insurance

For example, if you and your spouse have a Roth IRA worth $50,000, home equity of $75,000, cash value life insurance of $100,000, and a mutual fund worth $25,000. Under the federal financial aid formula, you are considered to have only $25,000 worth of assets (i.e., the mutual fund).

Purchasing a Life Insurance Child Rider

When you apply for life insurance, you have the option to add on a child rider when you purchase. So, not only will your policy cover your life, it also will provide a death benefit in the case that one of your children passes away. Also, even though you need a medical exam to get life insurance coverage, your child is underwritten non-medically, so they don’t need to undergo a medical exam.

What is the cost of a child rider?

The cost to add on a child rider to your policy varies between the different life insurance companies, but it tends to be a nominal fee. You typically pay a cost per unit, with a “unit” being an amount per thousand.

Something important to note is that the purchase of a child rider covers all your children. No matter if you have just one child or seven. So, in keeping with the previous example, if you do happen to have seven children, you do not need to purchase seven riders, the one will cover each of them with a $10,000 death benefit.

How long does the child rider coverage last?

The coverage ends when your child reaches age of majority and this age varies depending on which life insurance company you ask. The age range is generally somewhere between 18 and 25.

Another important note is the fact that you are guaranteed the option to convert all or some of the term policy rider into a permanent policy when the child reaches age of majority. There may be limits as to how much coverage you can convert, however. As an example, some life insurance companies may only allow you to convert up to 5x the original face amount of the rider. If we stay with the previously mentioned example, this means you would be able to convert the term policy rider into a $50,000 permanent policy.

Contact the Quotacy team if you are interested in purchasing a permanent life insurance policy. If you’re looking to purchase term life insurance on yourself, you can begin the process now by running an instant and anonymous term life insurance quote. Don’t wait to protect your family with life insurance.