Life Insurance – for Kids

/ November 14, 2012

Let’s face it.  Needing to buy life insurance for your kids tops the list of Things No One Wants to Think About.  It’s difficult to look at the long-term and financial reasoning behind a topic which is full of emotion.  Parents often can’t address it and many life insurance agents don’t broach this awkward conversation.  Therefore, it doesn’t get done.  However, we’ve cracked the subject wide open so let’s talk about why kids need life insurance.

Why Kids Need Life Insurance

Why do you buy life insurance?  As discussed in one of my previous posts, typically, we purchase life insurance to:

1)    Replace a working household member’s income

2)    Replace a service provided by a household member–maintenance of the home, child care

3)    Pay off large debts–school or other loans, mortgages, or we want to leave a legacy for our children.

Little Girl - iStockNow, why would you consider it for your children?

1)    If your child passes away, you want to be able to celebrate their life in a matter which they deserve.  Life insurance provides the cash for final expenses and you’re not left with the burden of a large debt on top of the loss of your child.

2)    If your child were to develop an illness or disorder (after you take out a policy) which makes them uninsurable, coverage is already in place and it can’t be cancelled.  Certain conditions may prevent an individual from purchasing insurance for a particular time period or, possibly, ever.  Purchasing a policy early on in your child’s life is particularly important if your family has a history of cancer, diabetes, or other hereditary disorders.  If you’ve purchased a policy for your son or daughter as an infant, they have coverage which will provide for them for the rest of their lives.  You can even sign ownership of the policy over to them as an adult.

NOTE:  Some adult policies will allow a rider where coverage can be placed even prior to a child’s birth.  It’s possible this rider can be converted to an individual policy for your child.  This is a wonderful rider to have if you find your child was born with a condition which would make them uninsurable. 

3)    If you’d like to provide your child with a financial gift, most policies will earn a cash value.  Parents will often purchase a policy for their child.  Then, when the child graduates from high school or college or gets married, parents will sign the life insurance policy over to the child.  The child can keep it in force, maintain coverage, and continue to earn a cash value.  Other options include taking out a loan or cashing out the policy.  The loan or cash can be used to pay for a car, college, or house down payment.

NOTE:  If you’re thinking of using it for your child’s college education, I would suggest a 529 or other savings vehicle.  Whole life insurance policies are a long term investment; it will be many years before you get out of your policy what you paid into it.  You can find much better interest rates in other investment options.  Speak with your financial planner about what’s best for you.

4)    If you’ve co-signed on a loan for an older dependent child, consider a policy which will pay off the loan balance.  See Protecting Yourself as Co-signer on Your Child’s Loan.

There are a number of products available.  Be sure to speak to an insurance agent regarding the product, the guaranteed cash value over the life of the policy, premium, payment options, age at which the policy expires, length of time on which you pay, and the total premium you can expect to pay into the policy.

Last, weigh the coverage needs against what you can afford.  It does not make sense to purchase life insurance if it takes away from the ability to pay for your home, appropriate clothing, health care, proper nutrition, and life insurance for the income providing adults.

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