Life Insurance for Children

Do you need life insurance on your children? Or is this coverage you should skip? Let’s evaluate the why’s and why nots of life insurance on children.

When you don’t need life insurance on your children

Placing life insurance on parents or wage earners is done for immediate financial reasons – if an income earner passes away tomorrow we need a large amount of money for the beneficiaries to live in the coming years.

This immediate financial concern is not the case with children. Children don’t have financial dependents and are not providing an income that others are dependent on. And as a result, the need for life insurance on children is non-existent for that purpose.

When you may consider life insurance on your children

We may decide to purchase life insurance on our children for future insurability or long term planning purposes.

Frequently parents who have insurability issues will foresee potential difficulty for their children to get life insurance when they’re adults. By purchasing life insurance when the children are young, you’re assured that they’ll have the coverage when they’re older.

In order to place this risk (what you’re insuring) into perspective, you should treat the cost of insurance not as a direct insurance cost (because we probably don’t need the insurance right now) but instead as the cost of guaranteeing your children’s insurability.

For example, if the premiums are $35/month, you should not consider this as $35/month for insurance. Instead, it’s $35/month to ensure that your children can purchase life insurance when they’re older. Is that then worth $35 a month until they’re older? Or would you rather leave this risk to your children? You should evaluate your decision from this perspective, as many people will not choose this type of policy when approached this way – but others may find it in fact is the type of policy they want to have.

The other reason parents purchase life insurance on their children is for future financial planning, and as a gift. By purchasing a policy when they’re young, the ownership can be transferred to the children once they’re adults. At that time the child should likely have a permanent lifetime policy, for very low premiums for the rest of their life (since it was originally purchased when they were younger). This can be a great teaching tool for young adults in the importance of planning for the future.

How much life insurance on children?
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There’s no firm guideline for the amount of life insurance coverage to place on your children. Some folks believe small policies such as $50,000 is sufficient. People who have insurability issues themselves and are seeking to prevent similar problems with their children may consider a $100,000 or $250,000 life insurance policy.

Type of life insurance on children

Purchasing life insurance on children is done for long term or lifetime needs. The intention is that the children will maintain their policy long into their adult lives, and hopefully for their entire lifetime.

This means that the correct type of life insurance on children should be permanent life insurance. More specifically, you should look only at fully guaranteed life insurance policies. Policies that meet these requirements are certain types of whole life insurance, term to 100, and universal life insurance.

For parents that want to offer a fully paid up policy on their children when they become adults, a variety of ‘quick-pay’ whole life policies are available. These policies have premiums that are not over the child’s entire lifetime, but instead are only payable for 20 years – after 20 years there are no more premiums owing for the life of the policy.

Be careful!

At some point you may expect to transfer ownership of the insurance (and perhaps premium payments) over to the children. My experience in dealing with adults who had policies such as this handed over to them as adults leads me to offer the following suggestions.

First, consider maintaining the policy premiums yourself rather than handing the policy over to your children. If you do this, you should however contact the life insurance company and make sure that your children are the ‘contingent owners’ of their policies. This ensures that when you pass away, the policies are transferred seamlessly to your children.

Secondly, if the life insurance policies have any type of cash surrender value, be very careful at what age you transfer the ownership of the policy over. A 40 year old will balance a $100,000 low cost life insurance policy against a $5000 cash value if they cancel the policy, and find more value in keeping the policy – as you intended. A 25 year old may very well dismiss the value of a $100,000 low cost permanent life insurance policy and instead value the $5000 cash value. Through the years I’ve spoken to numerous clients who cashed in these life insurance policies in their 20′s, and then later regretted it in their 40′s.

If you would like to discuss costs, options, or have any other questions about life insurance on children, feel welcome to contact Michael at 905-532-9922