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, but why would your child need life insurance? Your children may not contribute to your household income, but there are other reasons you may want to consider buying life insurance on your child.
Recouping Financial Loss
The most common reason to buy life insurance is to replace income and while children don’t provide income their death can still directly affect finances. 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. Of course the emotional loss is unimaginable, but consider the financial affects 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. You can purchase life insurance on your child in different ways. One way would be to purchase a child rider on top of your own life insurance policy. We talk about child riders more in-depth in our blog Life Insurance Coverage for Children. The other method would be to purchase a standalone life insurance policy on your child.
The first reason you may consider buying life insurance on your child is to compensate you for the financial impact losing a child may bring. 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 sufficient 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 previous factors.
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.
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 to see an estimate on what it may cost you. It’s probably less than you think. Don’t wait to protect your family with life insurance.
Photo credit to: Amanda beth.photography