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Do I Need Life Insurance for My Children?

When we think about purchasing a life insurance policy to protect our children, usually the idea of insuring ourselves is what we have in mind. But there are many other ways you can protect your dependents with life insurance. Buying life insurance for children has certain advantages that can help promote a sense of safety and security. Below we explore all the details involved in insuring your children and discuss why the decision to do so is a wise investment for some parents.

The fact that you are even asking the question, “Does my child need life insurance?” is a great step in the right direction. Many parents juggle work, childcare, extracurricular activities, and domestic duties, leaving little time to consider this aspect of their children’s financial security. According to a new survey, 37 percent of parents with small children have no form of life insurance at all. About half of all parents lack a will or living trust. Has your family prepared for the future with life insurance and a trust?

What Is Child Life Insurance?

Child life insurance policies are similar to those for adults except that they cover minors. They are intended to protect a parent or guardian from the unexpected cost of a funeral or burial. Purchasing a life insurance policy while your children are young and healthy also guarantees the child’s lifelong insurability. Plus, a permanent life insurance policy could serve as a vehicle for cash accumulation for your child’s future.

7 Reasons to Consider Buying Coverage

Funeral Expenses

At the most basic level, child life insurance is meant to compensate you for the financial expenses of a child passing away. While you may think that life insurance is only necessary for a person who provides household income, this notion completely overlooks the cost of laying a child to rest.

If your child were to pass away, you would be responsible for the same set of expenses as if your spouse passed on. When you factor the cost of a casket, funeral, burial, flowers, headstone, music, clergy, paperwork, transportation, and more, the average family spends nearly $10,000 on final expenses. Naturally this cost increases year after year. If you are not in a position to write a $10,000 check, then the answer to your question is, “Yes, I do need life insurance for my child.”

Help With Medical Bills

Some child life insurance policies contain “accelerated benefits.” This means that if a person becomes terminally or chronically ill, they may be eligible to receive accelerated benefits. Without accelerated benefits, parents of a child who develops a fatal illness could face unexpected medical expenses as well as funeral costs. These are early payments from the life insurance benefit amount that can be used to help pay for any medical treatment as a result of your child’s condition. Receiving these advanced amounts may lower the total amount of the benefit received at time of death, but because the medical tests and treatment costs associated with an advanced illness can be costly, this is a great added benefit to have. Accelerated benefits are especially valuable because the number one cause of bankruptcy in this country continues to be medical debt.

Lost Income

Additionally, the death of a child can be traumatic. It’s difficult to assess how long it might be before you could return to work. The bereavement period given by most employers averages 3 days for the death of a child. How much vacation or sick time could you use? How long could you go without your income? Would you need to return to work immediately for financial reasons? Having a financial cushion from a life insurance policy could give you enough time to return to your life when you are emotionally ready.

Bereavement Counseling

If you were to lose one of your children, your family would definitely need some counseling. The death of a child can be emotionally devastating, and this traumatic event has long-lasting effects on the lives of parents. Bereaved parents often report depression, poorer well-being, health problems, and marital disruptions following the death of a child. In fact, these symptoms persist long after the child has passed. Some have reported experiencing these issues as many as 18 years later. And unfortunately, the strain of losing a child can even lead to divorce.

What sort of mental health services does your health insurance plan cover? And will there be enough to cover the long process of counseling needed for healing to occur? Would marriage counseling be included in that? If not, do you have the resources available to pay for this out of pocket?

College Loans

Graduation cap with red tassel on top of money pileChild life insurance can become necessary for reasons that are unimaginable until they actually happen. If you help your child attend school by borrowing money for his or her education or co-signing for a loan, you could be responsible for those payments even if your child passes away.

Parents are more frequently choosing private loans for their children’s education, especially when federal loans don’t cover the cost, because of the favorable interest rates. While most federal loans will be forgiven if a child dies, not all private loans will. Imagine grieving the loss of a child while being tethered to student loan debt. This debt would be in addition to all the other financial fallout. And student loans cannot always be dismissed through a bankruptcy proceeding. Proceeds from a life insurance policy for children could help to satisfy these leftover obligations.

Charitable Event

Sometimes a child’s passing brings light to a particular cause. Many children are lost each year to rare and incurable diseases. When this happens, parents and family friends are often moved to raise awareness. People often achieve this goal by starting a petition for a change in law or the development of a foundation for others suffering from the same illness. For many parents, carrying this out in their child’s name can be a soothing and worthwhile process for their grief, and the payout from child life insurance can help fund the cause.

A Gift

So far, we have examined this issue from the perspective of you, the parent, needing a sum of money in the event of your child’s untimely death. However, one of the features of any life insurance policy is that you also have the ability to gift it to your child. This is because there are 3 parties involved in a life insurance policy:

  1. The insured—the person whose life you are insuring.
  2. The beneficiary—the person who receives the cash benefit should the insured pass away.
  3. The policy owner—the person who purchased the policy and pays the premiums. This could be the insured, the beneficiary, or a third party. In this scenario, it would be you (the parent) acting as the policy owner on behalf of your child. At any time after your child is legally an adult, you can transfer ownership of the policy to your child.

A young adult may be tempted to surrender the policy and use the cash value for something inconsequential. If you have concerns about this, you can hold off gifting the policy until later in life. A life insurance policy with cash accumulation can make one great wedding present!

How to Purchase Life Insurance for Children

Father holding book and reading story to two young daughtersThere are 2 main ways that people can secure life insurance for their children.

1. Purchase a Stand-Alone Policy

The first way is to purchase a stand-alone policy from an insurance company or health insurance agent. The policy, or policies, will have individual premiums and benefit amounts. There are two types of permanent policies with cash accumulation to choose from.

Whole Life Insurance

Whole life insurance is a permanent life insurance policy that offers the greatest amount of safety and security, with guaranteed level premiums and coverage for your entire life. Although whole life policies have higher premiums, the premium amounts are fixed and will not increase over the life of the policy. There is also a component of guaranteed cash value and an ability to earn dividends. Dividends are a portion of the insurance company’s profits that can be applied to increase the policy’s value.

Purchasing a whole life policy for your child is an ideal tool if you think they may want to borrow against it to buy a car, pay for college, or make a down payment on a home. If your primary concern is just to cover funeral expenses, there may be more affordable options.

Universal Life Insurance

Universal life insurance policies allow you to customize your coverage and premium amounts. This means you may modify the death benefit along the way to suit your current goals. Universal life insurance accrues cash value when the insurance company’s portfolio produces more profit than the minimum interest rate.

A universal policy may be an ideal child life insurance choice for the same reason as a whole life policy. You may make partial surrenders from the account value to help pay for educational needs or a business start-up. The main difference is that the affordability and flexibility is greater than with a whole life insurance policy.

2. Purchase a Child Rider

The second way you can purchase life insurance for children is to add a “rider” on your own life insurance policy. A rider allows you to increase or add coverage to a policy for an increased premium cost. This rider can be included at time of purchase, or it can be added to an existing policy. The coverage can be purchased in units, generally in increments of $1,000; about $20,000, or 20 units, is the maximum. The cost per unit will depend on which insurance company you purchase the policy through. Generally, coverage can be applied to all of your children listed on the policy rider. For example, if you have 4 children, this can be a big cost savings. The underwriting for the rider may require only some basic health questions.

Unlike a permanent stand-alone policy, riders typically only cover children up to a certain age (usually about age 25). The rider cannot be carried into adulthood like a universal or whole life policy, but it can be converted into a permanent life insurance policy for your child. If you do not have a life insurance policy for yourself, or the policy you have does not permit adding dependents, you will need to buy a stand-alone policy for each child.

What Does Life Insurance for Children Cost?

The cost of a life insurance policy will depend on several factors. The type of policy you choose, the benefit amount you select, and the age, sex, and health condition of your child all help to determine price. A permanent child life insurance policy with a $50,000 benefit can be purchased from some companies for about $30 to $40 per month.

How Much Life Insurance Do I Need for My Child?

The benefit amount you choose will depend on your goals for your child’s life insurance policy. If you are looking for basic coverage to shield you from the costs of burying a child, then a smaller amount of coverage may be appropriate. Adding a child rider to your life insurance policy may be fitting, and that could cost about $5 to $7 per $1,000 of coverage. For example, you could want $10,000 of coverage that is $6 per unit ($1,000). The cost would be $60 per year, or $5 per month.

If you are looking for a savings and growth component, then you may want to choose a higher benefit amount in a universal or whole life plan. A licensed agent can help you make a decision that fits your budget and your needs.

Can I Buy Life Insurance if My Child Is Already Sick or Disabled?

Boy in wheelchair sitting with two girls outside of school benchIf you have a child who has a serious illness or is disabled, finding a life insurance policy will be tough. The extent of your child’s condition, or to what degree your child disabled, will determine whether or not he or she insurable. While you may find insurance for your child without any problems, the cost of the policy may be as expensive as a plan for an adult with serious health conditions.

Still, life insurance for children can be valuable for a child whose condition might be improved by a policy with features such as accelerated benefits, which can provide access to funds for medical bills. Working with a licensed insurance agent can help you to make educated choices about your budget and unique coverage needs.

5 Tips on Buying Life Insurance for Children

Below are 5 tips on how to buy child life insurance.

1. Educate yourself on the different policy types and benefits.

Understanding the differences between universal and whole life insurance will help you to select the right policy for your child’s needs. Do you have short- or long-term savings goals? Would you rather have the most comprehensive or the least expensive policy? Do you want to use the policy as a cash accumulation tool?

2. Work with an agent to help identify the type and amount of insurance you need.

There are lots of different policy types to choose from and insurance companies that offer them. Not only that, but each policy has different benefit amounts and possible riders to select. Things can get very confusing. A trained agent can help you identify where your greatest needs are and assist you in selecting a policy that satisfies those concerns.

3. Be honest about any of your child’s health conditions.

Coverage amounts and premiums are calculated on known risk factors. You may be tempted to hide or withhold certain information about your child’s present health and family health history, but this will only lead to the insurance company challenging the legitimacy of your claim to benefits and potentially refusing to honor the policy.

4. Name yourself as the beneficiary.

It is important to name any person responsible for the care of your child as the primary beneficiary. This is most likely you and the other parent of the child, but it could also include a grandparent or other caregiver. Naming the right beneficiary allows you to use the proceeds from the policy to pay for any medical, funeral, or other related expenses. Naming yourself is especially important if you will be in charge of the child’s care and may miss time from work in doing so.

Choosing another adult (such as the other parent, grandparent, or God parent) who will be your child’s caregiver as the contingent beneficiary will guarantee that if you pass away your child’s caregiver will inherit the benefit.

5. Study the policy to be sure you understand all the details.

Understanding all of the perks and limitations of the policy is a key part of enjoying the benefit of life insurance. Read the policy carefully so that you understand how to make a claim, borrow against the cash value, and increase or decrease benefit amounts.

A Large Sum of Money

If you have elected to buy a whole life policy, there is a growth component to these types of insurance policies. Each year, the insurance company reports a profit they will pay out in dividends. These dividends are stored in the cash value of the policy. They compound in growth. The larger the cash value of the policy, the larger the dividends will be. Other tools such as a college savings account have only about a 25-year life span. But life insurance policies can remain effective for up to 80 years. Provided the policy is not allowed to lapse, by the time your child reaches adulthood, there could be a lot of money there, especially if your child holds on to the policy until retirement age.

Guaranteed Insurability

Buying life insurance for children ensures that they will have life insurance for the rest of their life. They do not have to worry about how contracting an illness or becoming sick can affect their ability to buy life insurance.

The most common example of becoming uninsurable for life insurance is juvenile diabetes. Depression is another common block to insurability. Drug or tobacco use can also complicate the underwriting process. If your child grows up to participate in risky activities such as extreme sports, scuba diving, or aviation, they can be denied life insurance. Having a policy already in place takes care of all these possibilities.

Low Cost

The cost of child life insurance is low, and the premiums will never increase. Purchasing insurance in adulthood is common, but it carries a higher price tag than having been insured since childhood. There’s also an increased risk of the application being denied the older you get. But insuring your children now gives them a low-cost policy that they can carry with them into adulthood and guarantees their coverage as they start families of their own.

A Financial Tool

If you have purchased your son or daughter a policy that accumulates cash value, they will be able to borrow against this. They may do this without a credit check, without paying taxes, and without it appearing on their credit history. These loans also offer lower interest rates than traditional bank loans. This difference is because the loan is secured by the collateral of the policy. Some parents even use life insurance policies as a financial teaching tool for their soon-to-be adult children.

Life insurance for children can be a wise and practical decision. HealthMarkets can help you to figure out how much life insurance you need for your child and which insurance type to buy. We offer free advice and work with many different insurance companies. We help you understand the complexities of each policy and how to select the right insurance solution for your budget and specific family needs. Call us today at (888) 411-5333 to learn more about all of our life insurance products, or to find an agent in your area. We can help you with a free quote on any of our insurance offerings.

Mario Pinzon

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