Life insurance policies are available for children and are often marketed as paying out a death benefit if the child were to pass away as well as potentially providing a savings vehicle for the insured. It’s a lot more comfortable to contemplate these policies funding, say, a child’s education than handling expenses at the time of death. But both are facets of these products. In addition, these policies can help prove a child’s insurability later in life. Let’s take a closer look if this coverage might be right for your family.
What Is Child Life Insurance?
Life insurance for children is similar to a policy for an adult. If premiums are paid regularly, then there’s the guarantee of a death benefit if the child dies. A parent, legal guardian, or grandparent takes out the policy (making them the policyholder). This person can be the beneficiary who would receive the death benefit, if applicable, but they don’t have to be.
Before getting into more detail about policies for children, here’s a brief overview of the two types of life insurance. Each is available for children as well as adults.
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Term Life Insurance
As the name implies, term life insurance comes with a pre-determined term, often 10, 20, or 30 years. If the insured person dies within that time frame, then a death benefit is paid out to beneficiaries (people designated to receive those funds). At the end of the term, the policy may be able to be renewed; allowed to lapse; or converted into permanent life insurance. If the insured is still alive at the end of the term (and we hope they are), there is not a refund of the premiums paid. The service was there waiting but wasn’t tapped.
For a child, this would typically be an add-on to a parent’s insurance policy. It would be a death benefit-only policy, but it might be able to be converted into an adult policy when the insured reaches adulthood. For instance, State Farm offers a product that is valid until age 25 and can be converted at that time without proof of insurability (that means no need for a qualifying medical exam).
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Permanent Life Insurance
Unlike a term policy, permanent life insurance doesn’t expire as long as premiums are paid. Whenever the insured dies, a death benefit is paid. These plans also involve a savings vehicle, in which part of the premiums paid go into a cash account which can later be tapped or borrowed against. Premiums are typically higher than term life insurance (often several multiples of the term life insurance price).
When getting this kind of policy for a child, yes, there’s the death benefit in case of a worst case scenario, but there’s also a component that builds a savings account, which is like a gift to the child. When the insured individual reaches adulthood (typically at 18 or 21 years of age, these policies often allow the now-adult to either take the policy’s cash value or continue payments and coverage.
How Does Life Insurance for Children Work?
The adult who plans to take out the policy will fill out an application. There isn’t a medical exam involved like there can be for adults, which streamlines the process.
Life insurance policies for children are often permanent life ones, meaning that coverage can last their entire lives if premiums are kept up. Premiums stay the same over the lifetime of the policy, and part of the premium is invested and becomes a cash value that can be withdrawn during the child’s life. These are usually whole-life policies, meaning the cash earns a fixed rate of interest.
Check the parameters of a policy that you’re considering buying. Many of them allow you to buy one for a child who is 17 years old or younger although some policies won’t go up to age 17. The policyholder commonly transfers the policy to the child when they become adults, but this can be done at any time and some policies automatically transfer into the child’s name at a designated time.
For term life insurance for kids, an option is to add a rider (an optional add-on) to your own term life insurance policy. This can be an affordable option, and one rider may cover all of your children in incremental amounts. The child would be insured to adulthood, at which point the policy would lapse or could be extended by the now-grown child, if they assume paying the premium.
When Does Life Insurance for Kids Make Sense?
Here are four reasons why you might decide to buy life insurance for kids include:
• Investment purposes
• Because of health issues or concerns
• To enhance future insurability
• In case the worst happens
Here’s more about each.
Investment Purposes
As premiums are paid, the cash value of a whole life policy (a popular kind of permanent insurance) gradually increases. When your child takes over the life insurance policy, they can surrender it (meaning, cancel the policy) and collect the cash value. They might choose to use it as collateral for a loan. Or they could keep paying for the policy, which will continue to increase the cash value. If this is your primary motivation, you may want to consider whether this goal is better served by another vehicle (say, a 529 savings account for college costs).
Health Issues or Concerns
If a child is born with health issues or your family has a significant, genetically determined health condition, having a life insurance policy may give you more of a sense of security.
Enhance Insurability
When purchasing a life insurance policy for a child, you are ensuring they have some insurance if they have a major health-altering diagnosis during the term of the insurance. There may be the possibility of extending this coverage.
The Worst Happens
Nobody likes to think about losing a child. If this traumatic event does occur, life insurance will help to cover funeral expenses without being subject to income tax. This can help to eliminate the financial worry of funeral costs and allow you to grieve without this concern. The policy may also cover therapy in this worst-case scenario and/or loss of wages if you were to take a leave of absence from work in the aftermath of this situation.
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Benefits of Child Life Insurance
What you’ve just read outlines some of the reasons why it can make sense to buy life insurance for kids. It can serve as an investment vehicle; provide security if health is a concern; boost future insurability, and cover expenses if the worst situation happens.
Here are some other benefits to consider:
• Life insurance for children tends to be very affordable. The younger a child is when you purchase the policy, the lower the premium.
• With whole and term life insurance, premiums remain the same, guaranteed, as long as payments continue being made.
• With a guaranteed insurability rider on the policy, more coverage can be purchased for that child without the need to answer health questions.
• This is true even when they’re adults depending on the policy type.
• If the child later accesses the cash value in the policy, they can use the money for their own unique needs — whether that’s for college tuition, a wedding, a car, or house.
How Much Is Life Insurance for Children?
Premiums are based upon the age of the child when the policy is first taken out (in some cases, this may be as young as birth or 14 days) and the amount of the policy. Price varies based on gender.
Coverage amounts are typically much lower than for a policy that insures an adult. After all, the goal here isn’t to replace the loss of earning power. Instead, the limits usually range from $10,000 to $100,000, but some companies may allow more than $100k. At the time of writing this post, a child who is four years old or younger can often be insured for a $10,000 policy for under $5 a month, and a $50,000 one for under $20 a month.
Prices increase incrementally as the child ages. By the time that they’re ages fifteen to seventeen, a $10,000 policy may be closer to $8 per month and a $50,000 one about $35 monthly.
The Takeaway
Child life insurance allows parents, legal guardians, and grandparents to apply and pay for a policy on behalf of a child. While a child doesn’t have earning power you are seeking to protect, there are benefits to this kind of policy, including creating a savings vehicle for the child. Take a careful look at the insurance options and your family’s financial goals to determine if this is the best path for you.
Protecting Your Family’s Lifestyle: Insurance From SoFi and Ladder
As you think about your kids, you may want to consider term life insurance to make sure that, if anything were to happen to you, their financial needs are covered. To help you get that kind of protection, SoFi has teamed up with Ladder to offer insurance that’s easy to understand, apply for, and get approval, as well as affordably priced. You can apply in just minutes for an instant decision with no fees. As your needs change, you can decrease or cancel coverage with no hassle: just a couple of clicks!
Photo credit: iStock/FatCamera
Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, Social Finance. Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under Ladder Life™ policies. SoFi is compensated by Ladder for each issued term life policy.
SoFi Agency and its affiliates do not guarantee the services of any insurance company.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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