Generally speaking, it doesn’t usually make sense to purchase life insurance for your children. While losing a child is devastating for any parent, no family is likely to be reliant on a minor’s income for survival. However, there are some special circumstances where buying life insurance on your child makes sense. At the very least, you don’t want to stress over the financial burden of giving your child a funeral. Especially since the average funeral in America costs anywhere between $5,000 and $15,000.
Does Your Child Make Any Money?
For most of you, the answer is likely “no.” It’s not very common, but some children do actually make an income. Child actors, for example, might bring in a large portion of a family’s income. Or perhaps you have a child who is a precocious entrepreneur. Thanks to technology, just about anyone can earn a living online. YouTuber Ryan Kaji, for example, is a nine-year-old who’s made $22 million, $29 million, and $30 million in the past three years, respectively. There are plenty others out there just raking it in at a young age. In the modern technological era, it’s not all that surprising to find kids that can provide for their families.
Leaving aside thorny issues of income, parents as managers, and other pitfalls that come with children earning money, the reality is that you might depend (to some degree) on the money your child earns. If that’s the case, you should definitely have an insurance policy for them. That way, if something terrible happens, you can replace some of the income that your child was bringing in.
Again, this isn’t really a factor for most of us. However, if you’re one of the few families that has a child earning income, it’s probably a good idea to start planning ahead. Look for ways to build your own income or start your own side business. At some point your child will reach legal age. You probably won’t be able to rely on that income forever.
Does Your Child Have a Condition That Could Prevent Coverage Later?
One of the problems that can arise with certain medical conditions is that they can make it tough to get life insurance coverage later. “Typically, people with seizure disorders have difficulty qualifying for an affordable life insurance policy,” says Katie Fitzpatrick, a representative of State Farm.
She tells the story of a mother from California who was able to purchase affordable life insurance for her infant son, Jude, having recently diagnosed with epilepsy. The policy comes with a guaranteed insurance option, so it will benefit Jude later in life. “[This] will allow Jude to purchase additional insurance in the future without proof of insurability,” Fitzpatrick says.
For many children born with such conditions, it can be difficult to purchase life insurance later in life. That’s why getting a policy while the child is still young is much easier. Many insurers don’t require a medical exam for minors. In fact, sometimes it’s just a matter of filling out a form online and having it underwritten all electronically. When you add an option like a guaranteed insurance option, the policy can help secure your child’s ability to protect their own family in the future.
Other Factors to Think About
Getting a life insurance policy for your kid might make sense even if your child doesn’t currently have any medical conditions. If your family has a tendency for developing diabetes, for instance, then it’s likely genetic. There are many other possible health conditions that are genetic, so speak to your doctor to be sure. If you want to make sure their children can get a policy before they may develop any chronic health conditions, then getting life insurance early may be the answer.
The other benefit of getting a life insurance policy while your child is young is cost. The cost of life insurance only goes up as a person ages. As soon as you buy a policy, you can lock in your rate for the life of the term. For those who want certainty, few options beat the comfort of knowing a life insurance policy will provide for a child’s future family.
As mentioned earlier, there’s always funeral costs to think about. If you don’t have much savings to fall back on, it might make sense to take out enough insurance to cover those costs. A common alternative is to add a rider to your own life insurance policy. Many insurers offer a basic $10,000 per child coverage for only a few extra dollars per month. Hopefully you never need it. But you’ll be glad to have one less thing to worry about if tragedy strikes.
Reasons to Avoid Child Life Insurance
On the other hand, a life insurance policy represents an extremely long commitment. You can get policies that will have you pay a monthly premium until the policy holder is 100 years old. If you opt for this option when your child is born, you’re committing to paying a monthly fee for the entirely of their life.
You should also understand that life insurance policies are cheaper for minors because it rarely works out for policy holders. You lock in a low rate partly because you are also giving up on decades of investment growth on money you pay via the monthly premiums. Barron’s recently did some digging and found that investing $3,000 in the Dow Jones Industrial Average or S&P 500 a century ago turned that sum into $41 million. Your life insurance policy won’t come close to having this kind of return.
Still, it might make sense to consider a life insurance policy for your child. There are some types of policies that actually pay out a return on investment at the end of the term. So your premiums wouldn’t be total loses. Discuss your options with a financial professional if you think your child will have a hard time purchasing life insurance later on. It could work in your favor.
The Bottom Line
In general, life insurance for your child isn’t usually the best financial choice. However, everyone has different circumstances. There are situations in which it does make sense. Getting a life insurance policy is a commitment but the cost may be worth it for you. Carefully consider your family’s needs and budget. Then consult with a knowledgeable and trustworthy financial professional. Finally, make a decision about what type of coverage, if any, makes sense for your situation.
