I have two little children aged 4 and 7 and I made sure to get life insurance for them. In this article, I’m going to break down children’s life insurance and the strategies you can use to find the best life insurance for your kids.
What is life insurance?
The primary function of life insurance is to provide a death benefit in case of tragic loss. You and others in your position commit to making periodic payments to the insurance company, and the insurance company takes the risk of a death actually occurring. In other words, the payments you make to the insurance company are small relative to the death benefit you receive in the event of a passing. Therefore, life insurance is designed to pay a death benefit that can help you cover your unexpected costs arising from death.
Why would anyone buy life insurance?
Life insurance can be an interesting investment, if used correctly. Life insurance cash value grows tax free (similar to Roth IRAs or 529 plans), loans and withdrawals can be made tax-free and the death penalty is general paid to beneficiaries tax-free. Additionally, if you do experience an unexpected loss, the last thing you want to worry about is having enough money to cover the expenses and budget hole that death can create.
Why would you buy life insurance for a child?
If you are a parent, it is wise to buy life insurance on your own life, so your children can be taken care of if you unexpectedly pass away. Life insurance for kids, on the other hand, should be considered carefully and on a case by case basis.
The risk of loss of a child is low and decreasing in the US thanks to medical advances. In 2019, only 37,334 children died in the US compared to 3.7 million US births per year. The unexpected death of a child, as hard as it is to think about, is thankfully a low-probability event. But there are other reasons to consider life insurance for your kids, beyond insurance for your child’s funeral expenses:
1. If you have a history of family illness:
When your child grows up, insurance companies may be less than excited to sell your child life insurance if she has developed an illness. If hereditary conditions run in your family, you can ensure your child can buy life insurance as an adult by taking out a policy when she is a minor. When you’re an adult, life insurance companies typically ask for a medical exam to evaluate your “insurability”. Since this requirement is waived for kids, it is easier for children to be sold a policy, no matter your family health history.
2. Your child may grow up to be adventurous:
Our children are all different. For instance, some grow up liking adventure sports or risky hobbies, like scuba diving or skydiving. In this case, insurance companies will not want to insure them in the future. As a result, with a child life insurance policy, you guarantee your child coverage as an adult.
3. Lock in a low monthly cost of coverage:
Most child policies are sold as whole life insurance. Whole life insurance is a type of life insurance where you pay a fixed premium every month and are guaranteed a fixed death benefit. Buying a policy when your child is young guarantees she will pay a lower monthly fee in the future, albeit for more years.
4. Disciplined way to grow a cash nest for your child:
Whole life insurance requires you to pay into the policy every month. Therefore, it can help families prioritize setting cash aside for their children. When your child reaches the age of majority, she will have built up a cash balance that can be used for a down payment for a home or to start a business. This is different from other tax-advantaged accounts like a 529 education account which needs to be strictly used for education or a Roth IRA which kickstarts savings for retirement.
If you choose life insurance for your child for one of the reasons listed above, you will also be covered for unexpected death and funeral costs. The cost of a child’s funeral is very location-dependent, so it’s important to research figures for your area so you aren’t underinsured. For instance, the cost of a funeral can vary from around $2,500 where I currently live to almost $7,500 in Chicago.
How much does life insurance for kids cost?
Term life insurance for children
I personally have life insurance for my two little children on a workplace plan through Metlife with $10,000 coverage on each child. As an example, this protection costs me $0.54 per paycheck or $12.96 per year for $20,000 worth of coverage. Not bad!
It’s always best and typically most affordable to get life insurance for your children as a rider to your term life insurance policy. You can add a rider to your insurance via your workplace or through your personal term policy bought through an insurer or broker. I highly recommend that option if it’s available to you. Term life policies for children are not sold separately from an adult.
A term life rider will not guarantee your child is insurable when she becomes an adult. Therefore, look for a policy with a conversion option, allowing your child to convert the term coverage to permanent life insurance.
Whole life insurance for children
If that option is not available to you, do not fret. Life insurance for children is still extremely affordable relative to adult life insurance. If you purchase it early enough, it could cost less than a premium Netflix subscription every month to get the best life insurance for your kids.
When should I buy life insurance for my child?
Using my two children as potential clients, I went through and checked various websites to determine the best life insurance for my kids. The results are below.
|A.M. Best Rating
|Mutual of Omaha
|A.M. Best Rating
|Mutual of Omaha
As you’ll notice, the cost for insurance for my 7-year-old son is more than for my 4-year-old daughter. Numbers don’t lie! If you are planning to buy insurance for your children, it’s important to open a policy while they are young so you lock in the lower monthly premiums.
What process do I follow to learn the cost of life insurance for my child?
The process to determine the cost of life insurance is:
- Firstly, decide what you are solving for: insurability or death
- Secondly, calculate how much coverage you need for your child. This figure will be lower if you are solving for death and higher if you want to guarantee insurability.
- Thirdly, call your current life insurance provider and ask how much it would cost to add your child through a policy rider. This will typically be the cheapest option.
- Then, if a term policy rider is not an option for you, shop around for the policy you want and build a table to track your offers
- Finally, when you choose the policy that best fits your budget, confirm your contract allows convertibility and protects your child from health check-ups in the future
Which life insurance is the best life insurance for kids?
There’s really three things to look at:
- A.M. Best Rating
- A.M. Best grades insurers on how well they can meet their financial obligations. The best life insurance for kids will have a rating of ‘A’ or above.
- Whole or term
- As explained earlier, whole life insurance is like an investment that grows over time whereas term life insurance premiums disappear at the end of the term.
- If you are mainly focused on covering costs in the tragic event of your child’s death, go with term life insurance. Look for a policy that allows you to convert to whole or permanent life insurance at a later stage.
- If you want to make sure your child is insurable when she grows up, go with whole life insurance.
- Cost is an important factor in any financial transaction. The lower the cost for the same amount of insurance, the better.
- Firstly, consider life insurance for your children.
- Secondly, the best place to get life insurance for your children is through your employers’ plan or your existing term life insurance, if it has the right protection for your child.
- If that’s not possible, it’s still very affordable to get whole life insurance for your children costing less than $20/month, if you start soon.
For more guidance on financial planning, reach out to Pasito. Or even better, refer Pasito to your company to help take some of the financial stress off your shoulders. Through personalized benefits and financial guidance, Pasito increases the value of your company’s overall compensation package and helps you cut down on thousands of taxes annually. These tax savings can then be distributed elsewhere (think: life insurance for your kids), thus increasing your financial wellness.
Disclaimer: We try our best to provide you helpful content. However, we do not offer financial, legal or tax advice. Please speak with a professional about your personal situation.