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Should I buy life insurance on my child?

Do you prefer to learn by watching? We answer this question in a video below. Click here to jump ahead.

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.

» Learn more: Term vs. Whole Life Insurance Guide

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.

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.

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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.

Example:  

You purchase a term policy from Company A and want to add on a $10,000 child rider. Company A’s child riders cost $5 per unit ($1,000), so you would pay an additional $50 per year.

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.

Watch the Buying Life Insurance on Your Children Video

Video Transcript

Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance agency where you can get life insurance on your terms.

I’m Jeanna and I’m Natasha.

Today’s question is:
 
Why would a parent buy life insurance on their child?

 
 
First, let’s clarify that while a parent may buy a permanent life insurance policy on their minor child they cannot buy a term life insurance policy. And this is because a term policy only lasts for a specific period of time so by the time the child is a grown-up and has a family of their own the coverage will have run out.

Permanent life insurance is a different story, however, and there are three reasons why a parent may want to buy a permanent life insurance policy on their minor child.

Three Reasons Why Parents May Want to Buy Life Insurance on Their Child

Reason number one is so that they have money available for a funeral and memorial should the worst happen. And not having to worry about money allows the parents to take time away from work to grieve.

The second reason a parent may want to buy a life insurance policy on their child is to start accumulating a cash value early on.

Cash Value

Money that slowly grows within some permanent life insurance policies. Cash value can be used by the insured even while they’re alive, kind of like a savings account.

 
 
So when a parent buys a permanent policy on their child when they’re young, the cash value has the potential to grow to a substantial amount by the time the child is an adult.

Correct. And not only can this cash value grow, but when it’s time for the child to apply for college financial aid the federal government’s formula does not include cash value life insurance.

So, having a permanent policy of their name won’t affect how much financial aid they can qualify for.

Exactly.

And the third reason a parent might want to buy a small life insurance policy on their child is to lock in their child’s future insurability. And this is a biggie because as an adult when you apply for life insurance there are two big factors that come into play that determine the cost of your life insurance: your age and health conditions. But if you buy that life insurance policy on your child before all that kicks in they won’t have to worry about possibly paying increased premiums or even being denied because of a health condition in the future.

And relating to last week’s topic, about insurable interest and consent, parents don’t need their child’s permission to buy life insurance on them, right?

That’s correct. This is essentially the only time you don’t need someone else’s consent to buy life insurance on them as long as that child is under age 18.

So is buying life insurance on your child a good idea?

It depends on your family situation. If your finances are solid and you already have investment plans in place, like a 529 college savings plan, then buying a small permanent life insurance policy on your child can be a great tool for their financial future.

If you have any questions about life insurance, leave us a comment. Otherwise tune in next week when we talk about how death benefits work in a term life insurance policy. Bye!
 

Photo credit to: Amanda beth.photography

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Marketing Content Manager

Natasha is a writer and content editor at Quotacy. She is also co-host of Quotacy’s YouTube series. She can't get enough of life insurance and outside of work is also working toward her Chartered Life Underwriter designation. Connect with her on LinkedIn.