Conley & Conley Insurance Solutions

The Hows And Whys Of Life Insurance For Children

The question of whether to buy life insurance for children sparks strong debate about the value of such policies.

Life insurance for children is often marketed to parents or grandparents as a way to save money for kids and to “protect their insurability,” meaning their chance to buy more life insurance later no matter their health. For these reasons, some life insurance agents say purchasing life insurance on a child can be a smart financial move, but many financial advisors caution against it.

“I struggle with thinking of reasons why it would make sense,” says Joseph Alfonso, a financial advisor in the San Francisco and Portland, Oregon, areas.

Most insurance agents and advisors can agree, though, on one point: Other, more critical financial matters should come first before you even think about buying a life insurance policy on a child. Those include building an adequate emergency savings fund, making sure you and the child’s other parent have enough life insurance and disability insurance, building savings for the child’s college tuition, and getting your own retirement savings on track.

How it works

There are a couple of ways to buy life insurance on a minor child:

  • You can buy some coverage on your child’s life if you purchase a term life insurance policy covering yourself or your spouse. You do this by buying a rider — an extra policy feature at added cost — that extends a small amount, such as $20,000, in life insurance to other family members, including children. Term life insurance provides coverage for a certain period, such as 10, 20 or 30 years, and pays a death benefit to the beneficiary if the insured person dies during the term. This is the only way to buy term life insurance on a child; there aren’t standalone term life insurance policies for minors.
  • Or you can buy a permanent life insurance policy, such as whole life, covering your child. These are generally for small face amounts, such as $50,000 or less. Permanent life insurance provides coverage for someone’s entire life and includes a savings account that gradually builds value over time. As a result, the premiums are much more expensive than term life.

The Gerber Life Insurance Co., which specializes in selling whole life policies for children, is the best-known name in the industry for juvenile life insurance. The company, an offshoot of the baby food maker, uses the famous face of the Gerber baby to market its policies directly to consumers.

But you can buy a permanent life insurance policy covering a child from just about any of the biggest life insurance companies. A parent or grandparent can make a child the policy owner once the child reaches adulthood.

About 20 percent of parents and grandparents say they have purchased coverage on kids, according to a survey of 2,000 adults by industry groups Life Happens and LIMRA.

Reasons to buy — or not

Here are the reasons some insurance agents give for buying life insurance for children, with the arguments for and against.

It provides money for funeral expenses and other costs

For: In the tragic event of a child’s death, a life insurance payout could pay for funeral expenses, family counseling and medical bills and provide money for the family to get by if the parents need to take leave from work.

Against: Statistically, the odds of a child dying are very slim. A smarter financial move than buying life insurance is to stash money into an emergency fund, which could be tapped for any type of crisis, says Keith Amburgey, CEO of Rutherford Asset Planning in Tampa, Florida.

It locks in a child’s ability to qualify for more life insurance later

For: A child who develops a medical problem early in life might have trouble qualifying for coverage later. By purchasing coverage now, you guarantee the child has some coverage and can buy more as an adult, regardless of health. This is a big reason people purchase life insurance on their children, says Marvin Feldman, CEO of Life Happens, a consumer education group funded by the life insurance industry. Feldman says he bought life insurance policies for his children and grandchildren.

Against: Amburgey says it’s “an expensive proposition for a remote risk. The vast majority of 20- and 30-somethings have no problem getting insurance.” In addition, Alfonso says, the amount that can be purchased later because of the “guaranteed insurability” is limited to a multiple of the original policy amount. In many cases, that total is too small to provide adequate coverage later in life anyway.

It provides a savings vehicle the child can tap later

For: The savings component of a permanent life insurance policy, called cash value, grows tax-deferred. The policy owner can borrow against the cash value or surrender the policy for the money, minus a possible surrender fee. The cash could be used for anything, including college expenses or the down payment on a home. A whole life insurance policy guarantees a certain percentage return on the cash value and compares well with other conservative savings vehicles like CDs, Feldman says. “It isn’t designed to be a primary savings and investment tool. It’s one of the tools for parents and grandparents to consider.”

Against: “The fees associated with life insurance policies usually eat away at the rate of return,” says Carrie Houchins-Witt, a financial advisor in Coralville, Iowa. She encourages her clients to think about how much life insurance fees would grow over time if invested elsewhere, then compare that to the cash value of a policy over the same term. “There are a multitude of opportunities to make a better return than through investing in life insurance,” she says.

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