We all want our children to live long, healthy lives, which is why child life insurance may not be a top priority. However, it is worth considering as it can secure low interest rates and serve as an investment vehicle for your children.
Find out more about this type of life insurance and find out if it is the right choice for your family.
What is child life insurance?
Child life insurance covers the life of a minor and is usually taken out by a parent or grandparent.
In general, these policies are lifetime products – one type of type permanent life insurance. This means that the insurance will last for the life of the child as long as the premiums are paid. The sums insured are usually low, often below $ 50,000, and the premiums are fixed, which means they won’t go up. The average annual premium for a $ 25,000 policy for a newborn is $ 140, according to Quotacy, a life insurance broker.
Life insurance is also expanding Monetary value – the investment component of the policy. Part of the premium is deposited into the account, which grows over time.
From a certain age, e.g. B. 18 or 21, the child can take over the insurance cover and continue the insurance cover, buy more or cancel the contract entirely. You can also keep the property rights.
The pros and cons of child life insurance
When deciding whether or not child life insurance is right for you, consider these three popular features.
1. Ensures future insurability
Child life insurance policies usually include or offer a guaranteed purchase option. “This will give you the right in the future to get a certain amount of insurance with a blocked health insurance policy,” says Chantel Bonneau, asset management advisor at Northwestern Mutual. This means that the child can purchase additional insurance without having to undergo a medical examination.
The additional coverage available varies by policy, and your ability to buy more may be limited to certain age groups or life events, such as marriage.
Advantages: This feature can be useful if the child is one Previous illnessLike diabetes, or choosing a risky career like becoming a pilot, both can have a dramatic impact on your child’s insurance costs and insurability, says Bonneau.
Disadvantage: Healthy applicants in their twenties are likely to get competitive prices. So, if you think the chances of your child developing a health problem are slim, then child life insurance may not be worth it.
2. Acts as an investment vehicle for your child
You can withdraw money from the cash account or borrow money for it. When the child reaches adulthood, they can abandon the policy and receive the money in full.
Advantages: The money can be used to cover costs such as school fees or a down payment for your child’s first apartment. It also grows tax deferred, which means you don’t pay any tax on the winnings until you withdraw the money.
Disadvantage: Cash accounts rely on you to pay premiums and they can take time to grow. Some financial advisors recommend exploring other options before considering child life insurance as an investment vehicle.
If it’s in your budget, you can open a Roth IRA for the child, says Roxanne Martens, a financial advisor at CGN Advisors in Kansas. Or, if your goal is saving up for education, check out options how 529 plans or a taxable brokerage account, she says.
3. Covers costs in the worst case
Losing a child can be very painful and there can be unexpected costs. Children’s life insurance pays out a lump sum in the event of death, as long as the premiums are paid.
Advantages: The payout can be used for expenses such as funeral expenses or bereavement services. It can also help cover the costs of running a business when you own the business and need to take time off, Bonneau says.
Disadvantage: It’s relatively uncommon for a child to die in the U.S. In 2018, the country’s infant mortality rate fell to an all-time low, according to the Centers for Disease Control and Prevention. Therefore, the risk of going uninsured cannot outweigh the cost of the policy.
Before the purchase
Assess your budget, review existing investments, and review your own coverage needs before purchasing life insurance for your child.
“If you had to choose between the life insurance parent or the child, in most cases we need to protect the parent who makes all the money,” says Bonneau.
You may want to consider adding a child driver to your own policy rather than buying separate coverage for your children. In some cases, you can convert child drivers to permanent insurance after the term has expired. Not all insurers offer these drivers, and coverage can be limited.
You may also find cheaper coverage through workplace plans, Martens says. “They often offer group policies for loved ones, and that can be an inexpensive way to get a small life insurance policy for children.”