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Is it smart to buy life insurance for your kids?

life insurance for kids

When you consider buying insurance on the life of a child, your first step should be ensuring he or she truly will benefit from the policy.

Advocates say life insurance policies protect the ability of children to buy life insurance as adults and build cash value that can be used to help pay expenses they'll face as adults. Critics say there are better ways to guarantee a child's financial future.

Weigh your options before deciding whether this insurance is right for your child.

What to consider before you buy

Eric Tyson, author of "Personal Finance for Dummies," doesn't recommend life insurance for minors.

"The principle of life insurance is to protect a wage earner's income to provide for their dependents," he says. And he notes that children typically don't earn income. "While a family would be devastated over the passing of a child, from a financial standpoint there is no sound reason to buy life insurance."

Advocates of life insurance for children say it's a good option if the family has adequate income and all of the child's other needs -- such as housing, nutrition and health care -- have been met.

If the parents have good financial resources, "then buying insurance for children is good," says Steven Rothschild, an Arizona-based insurance professional.

However, before buying life insurance for a child, parents should have their own life coverage, he adds. That way the child will be protected if one or both of the parents die.

Permanent vs. term coverage

Permanent life insurance typically is more expensive than term coverage. However, one of the benefits of permanent life insurance is that it can be structured to protect the future insurability of the child.

While term life offers coverage for a fixed period, permanent or "whole" life insurance builds up cash value on a tax-deferred basis and covers the child for his or her entire life.

There may be a guaranteed purchase option that allows the owner of the policy to acquire additional insurance for the child without evidence of insurability every three years, beginning during the child's early 20s, Rothschild says. That means a serious illness would not prevent the child from buying life coverage as an adult.  

In contrast, when buying term life for people with health problems, the purchaser typically must pay higher premiums. Medical exams usually are required to renew term policies. If an exam shows the child to be a poor insurance risk, he or she may be rejected as a policyholder.

Future financial security

Ellen Davis, president of Life Health Home Insurance Group LLC in Maryland, says buying permanent life policies for children can be an important part of a long-term strategy to guarantee financial security.

The policyholder effectively creates a fund that grows over time and can be borrowed against or cashed out. If the owner of a permanent life policy wants to withdraw money on an income-tax-free basis, generally he or she can withdraw as much as has been paid into the insurance plan.

If an insured child dies, the amount that was taken out of the plan then is deducted from the death benefit. Because insurance premiums are invested, the cash value over time can amount to more than what has been paid in premiums.

Permanent life insurance may also appeal to parents who are not comfortable with the ups and downs of the stock market.

A permanent life policy offers a measured approach to savings. Life insurance companies typically invest heavily in low-risk government bonds, and money grows slowly. Parents who co-sign for student loans can take out life insurance policies on their children so they'll have the money to repay the loans if the children die before the debt is retired.

Life insurance for children -- especially permanent life policies -- can be complicated. Consult friends and family members to find a knowledgeable insurance professional to be your guide. Davis says everyone's needs are different.

"Your personal situation is different from your next door neighbor's," says Davis. "You really have to find somebody you trust."

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