Child Life Insurance: When Does It Make Sense?
You may be wondering, should I buy child life insurance?
Insurance salespeople may be pressuring you to buy insurance for your child when you’re considering purchasing your own policy.
They say it will guarantee future insurability, could be used as an investment or may give you peace of mind.
Other common sales tactics include saying you could use it to help cover funeral expenses from an untimely death.
While these are technically possible reasons to buy child life insurance, the answer to the initial question is almost always no.
Like anything, there are exceptions. Here’s what you need to know about child life insurance to decide for yourself.
What is Child Life Insurance?
In general, child life insurance is sold as a whole life insurance policy.
These life insurance policies usually have small death benefits that rarely exceed $50,000.
The policies aren’t expensive.
While premiums vary based on the policy amount, expect to pay anywhere from a few dollars per month up to $200 per year for a policy for a newborn baby.
High death benefit amounts may have higher premiums.
The idea behind child life insurance is it locks in life insurance before a child can develop and medical issues that could disqualify them.
You can also use it to pay for funeral expenses should the child die early in life.
Insurance salespeople may say it’s an investment that builds cash value.
You can later use that cash value to help pay for college.
This is technically true, but the returns aren’t impressive.
In fact:
They’re usually very lackluster.
Benefits of Child Life Insurance
Child life insurance does have some benefits.
However, you must examine if the benefits are worth the cost.
Guaranteed insurability
Guaranteed insurability is one of the big benefits salespeople will use to try to get you to sign up for child life insurance.
When a baby is born, most don’t have any preexisting conditions that could disqualify them for coverage.
This isn’t always the case, but it is true for most babies.
Getting insurance as a child locks in insurability for the amount of the policy you purchased and any benefits it comes with.
If your policy is in effect and they get diagnosed with a rare form of cancer tomorrow, they’re covered.
This is mainly a fear tactic.
While a child may become uninsurable by the time they’re 18, it doesn’t happen in the vast majority of cases.
Secures life insurance rates early
When you purchase a life insurance policy, your rates are locked in.
Typically, the earlier you buy the policy, the lower your rates will be.
This financially makes sense from an insurance company’s perspective.
The earlier you start paying premiums, the more premiums they collect over the life of the policy.
Paying premiums earlier also gives life insurance companies more time to invest those premium payments to earn returns.
Cash value grows as an investment
Whole life insurance policies come with a benefit called cash value.
As you make your premium payments, part of the premium helps build the policy’s cash value.
You can then withdraw some of the cash value to use as you see fit.
You have to be careful using the cash value you build.
If the cash value of your policy is ever completely exhausted, your policy lapses.
Sadly, the cash value grows slowly at the beginning of a policy.
When compared to other investments, cash value usually doesn’t grow anywhere near as fast.
Death benefit can be used for funeral costs
Child life insurance proceeds can be used to pay for final expenses if your child dies as a child.
Thankfully, the chances of your child dying are extremely small.
Even if your child does die, the average funeral costs $10,000 or less.
While this isn’t a small amount of money, you can often find other ways to pay for these costs.
Drawbacks of Child Life Insurance
Child life insurance has plenty of flaws.
These drawbacks should make most people decide against buying life insurance for their children.
Cash value grows slowly
Cash value does not grow quickly.
Insurance companies aim to make money on life insurance policies.
Don’t expect the same returns you could get from investing elsewhere.
Historically, you’d likely end up with more money by investing the premiums you’d pay for a whole life insurance policy for a child.
For instance, you could decide to invest the money in an index fund instead of buying life insurance.
Of course, investment returns aren’t guaranteed. The past does not predict the future.
Premiums are expensive
Whole life insurance is one of the more expensive forms of life insurance.
It often costs much more than a comparable term life insurance policy.
One easy way to see how expensive these policies are is by comparing rates. Term life insurance generally isn’t available for newborns.
You can compare rates for your child’s whole life insurance policy to what an 18-year-old would pay for a term life insurance policy with a similar death benefit.
You might be surprised by the results.
Guaranteed coverage won’t amount to much later in life
Child life insurance policies normally limit death benefits to around $50,000.
While $25,000 or $50,000 sounds like a lot of money, and it is, it may not provide as much help as you’d imagine in the long-term future.
Sadly, it isn’t a lot of money when you consider the impact of inflation over decades.
Let’s say you purchase $50,000 of coverage today for your child.
If inflation is 3% per year, the death benefit payout would be worth the following inflation-adjusted amounts in the future:
- 18 years old: $29,370
- 30 years old: $20,599
- 50 years old: $11,405
- 80 years old: $4,699
Children don’t typically die as children
Dying as a child is very rare in the United States.
Life insurance companies know this due to their vast knowledge of statistics on mortality data.
This is why child life insurance is as inexpensive as it is.
When Does Child Life Insurance Make Sense
Child life insurance very rarely makes sense.
There may be legitimate reasons to purchase a policy, though.
Family health history
If your family has significant genetic medical conditions that may pop up early in life, child life insurance may make sense.
You could lock in rates and guarantee insurability.
Keep in mind that the value of death benefit will decrease over time as inflation eats away at the policy value.
Make sure you buy a proper amount of life insurance for the situation.
Rely on child’s income
In some rare cases, a child may support the family with their income.
They may be a YouTube, TV, or music personality with a generous income.
If the parents rely on this income to cover their expenses, they should purchase life insurance for that child.
These rare cases probably would not end up using a traditional child life insurance policy.
When It Doesn’t Make Sense
Most people shouldn’t purchase a child life insurance policy.
Unless you have a very specific need, you’re likely better off investing the money you’d put into a child life insurance policy yourself.
Frequently Asked Questions About Child Life Insurance
How much insurance can I buy?
Coverage amounts vary by insurer but typically max out around $50,000.
Does a child life insurance policy require a medical exam?
In general, most policies do not require a medical exam.
How much does child life insurance cost?
The cost of a policy will vary based on the death benefit and other factors.
Most policies cost less than $200 per year. This makes the monthly premium just a few dollars.
That said, some can cost more.
Alternatives to Child Life Insurance
You can achieve a similar benefit to child life insurance in many ways.
If you want the cash value aspect to cover the costs of college, invest using 529 plans.
If you want money set aside in case you have to pay for funeral costs, consider investing or putting money in savings accounts.
Over the years, the money can add up quickly.
You may also be able to add a child rider to your life insurance policy.
These usually insure a child until a certain age or until they get married.
They are often cheaper than a stand-alone policy, too.
Summary
Life insurance for children is customarily sold using fear or under the premise that it is a savings vehicle.
Know the facts so you don’t purchase unnecessary life insurance.
Now that you know how these products and services work, you can decide if they’re right for you.
Salespeople should give honest advice, but their commission structure influences them to sell you policies to earn more money.
For this reason, they’re not a suitable person to ask if a child life insurance policy is a good idea.
If you need help deciding, consult a fee-only fiduciary financial advisor.
These advisors require you to pay them a fee but provide honest and unbiased advice.
