Experts say no parent should ever go without life insurance. It's designed to cover lost income and support your family in the event that something happens to you. But it's debatable whether your child really needs his or her own life insurance policy.
Insurers say life insurance for children helps secure coverage at an early age and offers an easy way to save for that child's future. Financial advisers say life insurance policies are unnecessary for children -- you'd be better off investing your money elsewhere. In fact, many life insurance companies no longer write policies for children.
'Whole life' insurance for kids
Life insurance policies for children typically are sold as "whole life" policies with face values of $10,000 to $50,000. A whole life policy does not expire like a term policy does; it offers protection as long as you live.
You pay monthly premiums and, much like a whole life policy for an adult, a portion of the premiums goes toward a savings component. This allows you to build a "cash value" that can be borrowed against or surrendered (meaning you cancel the policy and receive the entire current cash value) after a certain period of time.
Buying life insurance for a child establishes coverage at an early age and guarantees coverage no matter what medical conditions say arise. Proponents recommend you buy a policy just after a child is born; that way, if a major medical condition is discovered even two years later, the child will be covered.
"There are situations where later in life they (children) could have a dangerous occupation or develop a disease that would prevent them from getting life insurance," says Dale Hall, chief actuary for life and health operations at Country Financial. "They … can have coverage throughout their life without having to undergo an underwriting process later in life that could result in high premiums or denied coverage."
Greg Blake, executive director of life insurance at insurance provider USAA, says that before discussing life insurance for a child, he makes sure the parents already have their own coverage in place. Parents then can add a child to their own policy or buy a separate policy for a little one.
"Life insurance for a child is not something you want to think about, but funeral costs are expensive and you don't want to turn something emotionally devastating into something financially devastating," Blake says.
Preparing for tragedy
While death claims for children who have life insurance policies aren't commonplace, Hall says they do happen. It can ease the grieving process if a family has a cash cushion from a life insurance policy that gives them the financial freedom to take time off work.
"It can be a financial and emotionally stressful event for a family. Life insurance can be beneficial at a time like that," Hall says.
Financial adviser Mari Adam of Adam Financial Associates in Boca Raton, Fla., says that if have enough savings to pay for a funeral -- roughly $6,000 to $10,000 -- you don't need life insurance for a child.
Saving for the future
The savings portion of a life insurance policy often is marketed as a way to save for a child's education or other future needs. The advantages are that the money isn't included when a college does a financial aid analysis and that the money can be withdrawn tax-free -- how much money went into the savings portion of the policy, plus any dividends you've earned. When an insured child reaches 18, he or she can surrender the policy and apply that cash toward educational expenses or other needs.
Adam says that because the rates of return on life insurance are so low and because only half of your premiums actually go toward the savings portion of the policy, you'd be better off putting money in an education savings account for your child. She points to 529 plans, Roth IRAs or other tax-deferred plans as better methods to save for a child's future.
With the Gerber Life College Plan, for instance, a 35-year-old parent who wants to take out a policy on a child under age 1 would pay premiums of about $73 a month. This policy would provide life insurance with a guaranteed savings portion of $20,000 when the child reaches age 18.
In that case, the insurance policy would yield an annualized growth rate on the savings portion of 1.8 percent. If that money were diverted to a 529 plan that grows at an average of 5 percent, it would deliver almost $28,000 over 18 years -- a 40 percent greater return than with the Gerber plan.