Most families focus on purchasing life insurance for mom and dad. Parents want to make sure that the family is taken care of if one parent should die, and a life insurance policy is the best way to replace lost income and cover major expenses.
However, many financial planners recommend that parents also consider purchasing life insurance for their children as well. While some might balk at the idea of life insurance on a 5-year-old, there are a few very good reasons that parents should buy policies for their kids.
No one wants to think about the possibility of their child dying before they do. Yet it can happen. Most people look at life insurance as a means to replace income after an income-earner dies, but the money can also be used to cover the final expenses of the deceased. Final expenses — even for a child — can easily reach $10,000 or more, when you account for caskets, grave markers, funeral expenses, and other fees. Most parents aren’t in a position to pay those costs out-of-pocket, but a life insurance payout can cover those costs.
However, life insurance doesn’t just cover the practical expenses associated with the child’s death. Insurance policy proceeds can help cover other costs, including bereavement counseling for the family, medical care for the child before death, and lost income due to time away from work. A substantial life insurance policy also allows parents to complete charitable endeavors in their child’s name. While many parents start foundations or collect donations in their name of their deceased child, an insurance policy will add to those funds and allow the family to do even more good in the name of a loved one should a tragedy occur.
Adults who purchase life insurance on themselves or a spouse often face a chance of being uninsurable due to health conditions, lifestyle choices, hobbies, and family history. If they are insurable, it’s often at much higher rates. Of course, the time when most adults qualify for the best rates — their 20s — is the time when they are the least likely to purchase a policy. After all, when you’re struggling just to make ends meet, you’re probably not going to be in a big hurry to take on a monthly expense for something you don’t think you will need for a few decades.
Parents, then, can do their children a big favor by purchasing a life insurance policy while they are still young and healthy. Serious medical conditions that develop in childhood, such as diabetes and depression, can actually render an adult uninsurable, so purchasing a policy before those conditions develop — even if you have no reason to suspect they will — can give your child at least some coverage in adulthood. Another factor that affects adult insurability is family history.
If you have a disease, especially a genetic condition, insurance companies may be unwilling to cover your child in the future, or will charge them higher rates. Again, purchasing a policy now is in effect insurance against future expenses should they develop the same condition.
Purchasing a life insurance policy now also prevents your children for being penalized for any hobbies or careers they choose in the future. It’s unlikely that your 6-year-old spends his or her weekends scuba diving, racing motorcycles, or hang gliding, for example, but there’s no guarantee they won’t take up those hobbies, or choose a high-risk career, in the future. If they already have insurance, there’s no risk of those activities being held against them.
Cash Value for College (Or Other Expenses)
While the greatest value — and the purpose — of a life insurance policy is the death benefit, a whole or universal life insurance policy can actually serve as a tax-deferred source of cash. If you need money to help pay for your child’s college expenses, or to help him or her with the down payment on a home, for example, you can borrow cash from the policy value. Some policies even allow policyholders to take money out of the policy up to a cost basis without paying taxes at all. Of course, there are some drawbacks to taking loans from an insurance policy, including a lowered death benefit and the potential for a lapsed policy, but if you would like a “safety net” in addition to other savings, buying a life insurance policy is a disciplined way to grow your child’s savings.
Most life insurance policies on children are very affordable. However, the peace of mind that they bring to parents — and later to the children themselves — is priceless.
Updated: August 11, 2015