What is child life insurance?

Child life insurance protects a minor's life and is usually purchased by a parent or grandparent.

In general, these are whole life policies, which are a type of permanent life insurance. This means that coverage is guaranteed for the duration of the child's life, as long as the premiums are paid. Coverage amounts are typically low, often under $50,000, and premiums are fixed, which means they will not increase. According to Quotacy, a life insurance brokerage, the average annual premium for a $25,000 policy on a newborn is $140.

Whole life insurance also accumulates cash value, which serves as the policy's investment component. The account is funded with a portion of the premium, which grows over time.

At certain ages, such as 18 or 21, the child can take ownership of the policy and continue coverage, purchase additional coverage, or cancel it entirely. You may also choose to keep ownership.

The pros and cons of life insurance for children

Consider these three popular features when deciding if child life insurance is right for you.

1. Guarantees future insurability

A guaranteed purchase option is typically included or offered in child life insurance policies. “It gives you the right to buy a certain amount of insurance in the future at a fixed health classification,” says Chantel Bonneau, wealth management advisor at Northwestern Mutual. This means that the child can obtain additional coverage without having to undergo a medical exam.

The additional coverage available varies by policy, and your ability to purchase more may be limited to specific ages or life events, such as marriage.

Pros: This feature can be useful if your child develops a pre-existing condition, such as diabetes, or chooses a risky career, such as becoming a pilot, both of which can have a significant impact on life insurance costs and your child's insurability, according to Bonneau.

Cons: Because healthy applicants in their 20s are more likely to secure competitive rates, child life insurance may not be worth it if you believe your child's chances of developing a health issue are low.

2. Acts as an investment vehicle for your child

You can take money out of your cash value account or borrow against it. When the child reaches the age of majority, he or she can surrender the policy and receive the full amount.

Pros: The funds can be used to cover expenses such as school fees or a down payment on your child's first home. It also grows tax-deferred, which means you don't have to pay taxes on the gains until you withdraw the money.

Cons: Cash value accounts require you to pay premiums and can take time to grow. Before considering child life insurance as an investment vehicle, some financial advisors advise considering other options.

According to Roxanne Martens, a financial advisor at CGN Advisors in Kansas, if it fits your budget, you can open a Roth IRA for the child. If you want to save for education, she recommends looking into 529 plans or a taxable brokerage account.

3. Covers costs if the worst were to happen

Losing a child can be excruciatingly painful, and you may incur unanticipated expenses. As long as the premiums are paid, child life insurance policies pay out a lump sum in the event of death.

Pros: The payout can be used to cover expenses such as burial costs or grief counselling. According to Bonneau, it can also help cover the costs of running a business if you are the owner and need to take time off.

Cons: It is uncommon for a child to die in the United States. According to the Centers for Disease Control and Prevention, infant mortality in the United States reached a historic low in 2018. As a result, the risk of not having coverage may outweigh the cost of the policy.

Before you buy

Before purchasing life insurance for your child, consider your budget, existing investments, and your own coverage needs.

“If you had to choose between the parent having life insurance and the child having life insurance, in most cases, we need to protect the parent who is bringing in all the money,” Bonneau says.

Instead of purchasing separate coverage for your children, you may want to consider adding a child term life rider to your existing policy. When the term expires, you may be able to convert child riders to permanent coverage in some cases. These riders are not available from all insurers, and coverage amounts may be limited.

Workplace plans may also provide more cost-effective coverage, according to Martens. “A lot of the time, they offer group policies for dependents, which can be a cheap way to get a small amount of life insurance for children.”