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Life Insurance for Children

Not all children’s life insurance is created equal. It can be tough picking out the right kind of policy. I became an insurance advisor because I got bad advice about picking out my daughter’s life insurance policy. With that said, it is not difficult to pick out the right policy. You simply need to understand how the product works.

I’ll discuss 3 main considerations when it comes to policies for kids. 1) The types of products available 2) the solutions life insurance solves and 3) planning for your child’s future. Sprinkled through the article, I’ll have a few warnings on traps in the industry.

Coverage Available

You’ll note that not all life insurance products are available to children. Most notably stand alone term life policies (or short-term policies).

Whole Life

Whole life polices are the ones most commonly marketed for children. There’s good reason. My first recommendation for most parents is to take out a whole life policy for their child. If properly structured, they can offer the highest return on your money and leave your child the most protected.

Warning: Parents will often make the mistake of planning to pay off the whole life policy long term (usually until age 121). In my experience this is often a waste of money. The thought of the parent is that they will transfer the payments of the whole life policy to the child after they’re older. Young adults often struggle understanding why they need to continue paying the policy off and look for ways to surrender the policy.

What’s the solution?: Buy a policy that can be paid off in 20 years. They extra cost is rarely significant and this way you are gifting the policy to your child. If the company doesn’t offer this option, they are probably more marketing gimmick than life insurance company. This is a recommendation most agents won’t make because they’re either unaware, or fully aware that the product pays less in commissions as more of your premium is going to pay the cash value.

Make sure you look for a company that offers dividends. Each insurance company chooses what to do with their profits. Some companies pay their profits out to shareholders as others will pay them out in the form of dividends to policyholders with whole life insurance policies. These dividends buy additional coverage and allow your policy to grow without any additional cost. The strongest dividends tend to come from Fraternal companies due to the tax benefits they get.

This is all part of the planning process. When you open a whole life policy with a dividend paying insurance company, you end up with two sources of income going into the policy. The policy pays both a guaranteed interest rate and a non-guaranteed dividend based on the company’s profit. Companies often compete to keep their dividends high. With dividend the amount of coverage will grow with the child and has the potential of growing by multiples, especially if you pay the policy off early.

Solutions Whole Life Solves:

  1. Preparing for your child’s financial future: I have people who call me every day in positions where they can’t obtain, or afford coverage. If parents would simply purchase these policies while their children are young, they would save a lot of heart ache further down the road.
  2. Building cash value for the future: Your child may need money for college one day, or for an investment, or to buy a house, or for anything. There are few requirements on insurance loans as it is a government guaranteed right to your money. People can get nervous thinking that borrowing from a policy is a sign of desperation. It doesn’t have to be. Many companies offer products where your policy could continue growing money after the loan has been taken out. It’s best to pay back, but you don’t have to. Insurance loans require no qualification and have no real fees compared to other forms of loans. It makes much more sense than equity in a home that is tied to the property, expensive to borrow from and requires qualification.
  3. Permanent coverage: Let’s say you purchase a policy for your child. With the right set up, you can maintain ownership of the policy and allow them the ability to always provide for their loved ones. They never have to ask how much coverage will cost in the future for the amount you’ve covered them for.
  4. Protection when you can’t be there: Many times I’ll get calls from clients. They realize they can’t protect themselves (they are too sick to qualify for coverage or the coverage is too expensive), so they’ll purchase these policies for their children. The purpose behind it being their child has the benefit of security from their own policy. Whole life is a policy that provides real protection to the owner, not just the protection to the beneficiary like term.

Indexed Universal Life

Indexed Universal Life is similar to Whole Life that it is a permanent policy. The policy instead of relying on dividends to grow uses options in the stock market. Part or all of your guaranteed interest is used to by options on a fund like the S&P 500. This way the account does not go down if the market does poorly, but does go up if the market does well during the option term.

I rarely recommend this kind of product as participating whole life is often much safer with more guarantees built in. It is available.

Term Rider

Term policies are not available for children independently. Child riders can be added on to a parents rider. This is much more affordable as riders tend to run in the ballpark of $50-$70/ year (added to the parent’s premium) and typically cover all of the parent’s children. They can be added to term and permanent policies.

The cost is low because the risk is low. It is rare for a child to pass between the ages of 15 days and 18 years old. The riders often cancel around the early 20’s for the child and many can be converted into permanent policies around the time the rider is set to lapse. They are usually only available for $5,000 – $25,000 in coverage per child.

Solutions Term Riders Solve

  1. Sick Children: Child riders don’t require a medical exam for the child, and although most require basic medical questions answered and underwriting, not all do require medical questions to be answered.
  2. Covering Burial Expenses: Although child death is rare, it is not impossible. These policies allow a cheap way of providing a death benefit in the unlikely chance a child dies.
  3. Future Insurability: Sometimes it is hard to afford permanent policies for your children. These riders often allow future conversion when it might be more practical to afford individual policies. With this said, if a child is healthy at the time of conversion, it can make sense to write a whole new policy looking at the available products. It is uncommon for a child to be