No one wants to think about life insurance for children when they are busy changing diapers, doing round-the-clock feedings, or trying to make them stop crying. But it’s never too early to start planning your child’s future.
I’m not talking about planning their first birthday or saving up for their school; considering life insurance for your kids is a great way to prepare for even the worst situations.
As parents, grandparents, or guardians, the last thing we want to consider is any bad thing happening to our children. However, we must protect our children, and buying life insurance for children is one way to do so.
Even the best life insurance companies have coverage designed to protect children, either by covering unexpected death or providing cash value that your child can use later in the future.
So let’s take a brief look at how life insurance for children works and why buying life insurance for children is not a waste of money.
What is Life Insurance for Children?
Life insurance for children is a policy purchased by a parent, grandparent, or guardian for their dependent minor. In this case, the child is the insured, and the parent is the policyholder.
Monthly or annual premiums are paid with the promise that if the child dies, the insurance company will pay a death benefit to the policyholder. The coverage is set to last for the child’s lifetime as long as the premiums are paid.
Premiums are usually locked in (guaranteed and won’t go up), and a portion of the premium goes toward cash value. The cash value grows over time and can be accessed by the child to cover future expenses.
At 18 or 21, your child can take ownership of the insurance policy and continue, buy more, or cancel it if they wish.
Top 5 Reasons Why Life Insurance for Children is Not a Waste of Your Money
You might ask, “Should I buy life insurance for my child?”. The answer is a resounding YES! Buying life insurance for children is not a waste of money.
Instead, it is a good solution for some families, as uncomfortable as the thought of life insurance for children may be.
Here are a few reasons to consider purchasing life insurance for your kids.
1. Life Insurance for Children Protects Your Child’s Insurability
By buying life insurance for your kids, especially now that they have no injuries, significant illnesses, or severe health issues, you can protect their insurability for decades to come.
When you buy life insurance for your children, you are guaranteed that they will have coverage even if they develop a health condition in the future. Plus, your children can purchase more coverage in the future without going through a medical exam.
2. Life Insurance for Children Provides Vehicle for Intergenerational Wealth Transfer
If you are looking for the most efficient way possible to transfer wealth to your children or grandchildren, life insurance for children is a good option.
You can buy a permanent life insurance policy on your child or grandchild and build up tax-deferred cash value by making excess premium payments.
After a few years, preferably after 20 years, but most importantly when the child is no longer a minor, you can transfer the insurance policy to your child tax-free, which they can use to fund their education, plan for their wedding, make a down payment on their first house, or even buy their first car.
The transfer is done tax-efficiently without giving up the gift or attracting the assistance and costs of lawyers.
When the policy is transferred, the child becomes the new policy owner, without any tax consequences, and can choose their own beneficiary to receive the death benefit so the gift continues after they die.
So, if you are retired and have more wealth than you need, and want to leave a legacy for your children with consideration for efficient tax strategies, you can buy life insurance for children to secure your children’s future.
3. Life Insurance for Children Provides Additional Saving Option
Some percentage of the monthly or annual premiums you pay for life insurance for children goes toward building cash value. The cash value policy provides a saving vehicle for your kids.
When you buy a life insurance policy for your kids, a more significant portion of the premiums goes towards the cash value because there is a lower cost of insurance and more time to build cash value.
You can access the cash value you build anytime and for any reason. You can withdraw money from the cash value or borrow against it. The money can cover costs like tuition fees, a first car, or a down payment for their first home.
The cash value grows tax-deferred; you won’t have to pay taxes on the gains. However, when you withdraw from the cash value policy, you will trigger a tax bill that will reduce the death benefit.
4. Life Insurance for Children Keeps Premiums Affordable
Life insurance for children policy comes at a very low and affordable rate. As far as insurance policy goes, child policies are the most affordable. You can never get a lower rate on any insurance policy, like when your child is newly born or still a minor.
While a typical whole life insurance policy for adults costs thousands of dollars annually, paying a few cents daily or a few dollars monthly to protect your child is a good bargain.
5. Life Insurance for Children Can Provide Funds to Cover Funeral Expenses
No one wants to think about their child dying, and the chances of that happening is very low. However, in the unlikely event that your kid dies at an early age, you can use the death benefit from the life insurance for children policy to cover any cost associated with that unfortunate event.
This is not a good reason to buy life insurance for your child. However, if your child dies, the death benefit will help cover the final costs, the funeral expenses, and others.
If you and your spouse need to take time off work to grieve or attend private counseling, this money can still be helpful.
Types of Life Insurance You Can Buy For Children
There are three options when looking for the best life insurance policy for a child. Some may require nothing more than a phone call to the best insurance companies in Canada.
1. Insurance Coverage for Life (Whole or Universal)
The whole life or universal life insurance policies, even though they are more expensive than term life insurance policies, are the best life insurance for children. They offer comprehensive coverage and are the perfect tool for intergenerational wealth transfer.
These whole life insurance policies will cover your children for life. However, the premiums are much higher, but you will be guaranteed of financial security for your children’s future.
These life insurance policies often include an investment option. However, they have higher fees than other life insurance types, but the financial security they offer your children offsets the higher fees.
If you are a very high net worth individual, the whole or universal life insurance for children is surely the right option for you.
2. Child Term Rider (CTR)
If you already have a life insurance policy for yourself as a parent or guardian, one easy way to get life insurance for kids is with a CTR. Child term rider, also called Children term rider or child rider, is the least expensive way to get life insurance for children.
You can add a rider to cover your kids to your life insurance policy with any insurance company in Canada. The insurance policy will pay out a death benefit if your child dies while your insurance policy is in force. If you are buying life insurance policy solely for the death benefit, then the CTR is the perfect option for you.
These riders offer guaranteed insurability till your child reaches 21 -25 years. Your child can purchase their life insurance policy at these ages without worrying about medical.
3. Stand Alone Term Renewable Coverage
Unlike the CTR, you can buy this life insurance policy specifically for your children. As a renewable term policy, it expires after some years and can be renewed at these predestined intervals. Your child would not need to supply additional medical evidence for renewal.
You can convert the insurance policy from term to permanent or whole-life before it expires.
Final Thoughts on Buying Life Insurance For Children
Is life insurance for kids necessary? Yes. However, that’s a decision you must make for your family. Assess your budget and look at your life insurance policy before considering buying for your kids.
Ensure you have taken care of all other financial priorities before buying life insurance for your kids. If you have room in your budget after this, you can consider purchasing an insurance policy for your child.
If you already have an insurance policy, consider adding a CTR to your policy.
If you have group life insurance from work, you can buy supplemental life insurance for your kids.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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