Child life insurance is a specific type of life insurance designed to cover the life of a minor. Parents, guardians, or grandparents typically purchase this policy for a child. While insuring a child might not be on everyone’s radar, there are unique circumstances where child life insurance could provide valuable financial protection.
How Child Life Insurance Works
Child life insurance is usually a form of whole life insurance, a type of permanent coverage. This means the policy remains in effect for the child’s entire life as long as premiums are paid. The coverage these policies provide tends to be modest, often under $50,000, and the premiums are fixed, so they won’t increase as the child grows older.
Whole life insurance policies feature a cash value component that grows as premiums are contributed over the years. The cash value can be borrowed against or withdrawn by the child when they reach adulthood, typically at 21. They can now choose to continue the coverage, increase the amount, or cancel the policy altogether.
Why Consider Child Life Insurance?
1. Guaranteed Insurability for the Future
A key benefit of child life insurance is securing future insurability. Many policies include a guaranteed purchase option, allowing the child to buy additional life insurance later in life without needing a medical exam. This choice can be especially advantageous if the child encounters health issues or pursues a high-risk occupation.
However, it’s important to remember that life insurance rates are typically lower when a person is young and healthy. If you don’t anticipate your child having health issues or a risky job in the future, purchasing child life insurance may not be necessary, as it may be more cost-effective for them to buy life insurance as adults.
2. Savings Potential Through Cash Value
In addition to providing life insurance coverage, child life policies also accumulate cash value over time. A part of the premiums paid is allocated to an interest-earning account that appreciates without being taxed. The policyholder can borrow from or withdraw these funds when they reach adulthood. This can be a valuable financial resource to cover significant expenses, such as education or a down payment on a home.
However, cash value growth is typically slow, especially when premiums are low. The accumulation may not be as substantial as other investment options, so if your primary goal is saving for your child’s future, other savings tools or investments may offer better growth potential.
3. Safeguarding Your Finances During a Catastrophe
One of the main reasons some families purchase child life insurance is to provide financial protection in case of the worst possible scenario — the death of a child. Although it is limited, the policy offers a one-time payment that can be utilized for covering funeral expenses, burial costs, or other unforeseen expenses.
Despite the emotional benefits, child mortality rates are low, and the likelihood of needing the payout is relatively rare. As such, families may find that setting aside emergency savings might be a more cost-effective option compared to paying for a child’s life insurance policy.
When Is It a Good Idea to Buy Child Life Insurance?
Child life insurance can make sense in certain situations. For example, you may want to consider it if:
- Your child is a young celebrity or public figure earning a significant income.
- Your child contributes financially to the household through a part-time job.
- Your child provides valuable services to the family, such as looking after younger siblings or helping in a family-owned business.
In other situations, it may be more beneficial to consider adding a child rider to your life insurance policy. This type of rider provides coverage for your children at a lower cost and can often be converted into permanent insurance once the term expires.
Alternatives to Child Life Insurance
If your primary goal is to set aside funds for your child’s future, there might be different financial products that better suit your needs. For instance, 529 college savings plans or other investment accounts often provide higher returns than life insurance. Additionally, many employers offer group life insurance that may allow you to purchase supplemental coverage for your children. However, remember that group policies are typically tied to your job, meaning you may lose coverage if you leave.
Before You Buy, Consider Your Life Insurance. First
Before purchasing child life insurance, take a step back and assess your life insurance needs. Generally, your life insurance policy should be prioritized over purchasing coverage for your child, as it will provide crucial financial protection for your family in the event of your death. If you’re uncertain about whether child life insurance is suitable for you, take the time to consider the advantages and disadvantages thoroughly and investigate all possible options.
Need Help or Advice with Child Life Insurance?
If you’re still unsure whether child life insurance is the right option for your family or if you need guidance in choosing the best policy, consider contacting Community First Insurance. Their group of specialists can assist you in evaluating your circumstances and identifying the appropriate coverage customized to meet your family’s requirements. Don’t hesitate to contact them for professional advice and assistance.