Should you take out a life insurance policy on your children?

Every parent wants to protect their children. So it makes sense that they would consider taking out a life insurance policy on their kids. But it may not be the most suitable financial move in this situation. The primary purpose for buying life insurance is the need for a death benefit. For example, as a means to provide financial protection for the dependents named as beneficiaries if the breadwinner passes away unexpectedly.

Before you become the policyholder of a child life insurance policy, learn what two Certified Financial Planner™ professionals have to say about buying life insurance for children — and ask yourself whether it’s really worth it, or whether there may be other ways to help ensure your child has the financial resources they need to be successful in the future.

The purpose of life insurance

The biggest reason to buy life insurance is to financially protect the people you leave behind. While parents may face unexpected expenses after a child’s death, including funeral costs, there is less of a concern about how the household will function financially.

“Although parents and others will suffer an extreme emotional loss in the instance of losing a child, there is not going to be a significant financial loss of income or salary to replace,” Kayse Kress, CFP® professional with Physician Wealth Services, explains. “Typically, living expenses for the family will reduce and they may be able to cover final expense payments needed without significantly affecting their savings.”

Kress suggests that when parents consider how much life insurance to purchase and whether they should take out a life insurance policy for a dependent child, they should look at it in the context of salary replacement.

Why some parents buy life insurance for their children

Parents who do purchase life insurance for a child, including term life insurance coverage, are often motivated by the idea of providing for their children in the future. This is because many life insurance companies advertise juvenile life insurance policies with a focus on the cash accumulation feature. While some parents may choose term life insurance, others may prefer whole or universal life insurance, which provides permanent coverage.

“Most baby life insurance policies are whole life insurance policies which have a cash value component that can be borrowed against,” notes Joel Ohman, CFP® professional and the founder of InsuranceProviders.com. “Many new parents are quick to purchase a life insurance policy for their baby because of the built-in cash accumulation component of many of those types of policies.”

In other words: If you buy a permanent life insurance policy for your child, you’ll be able to borrow against that policy in the future. Some parents view whole life insurance or universal life insurance (both of which are permanent life insurance policies) as a method of college savings or a way to safeguard against medical bills. After all, they can always borrow against the cash value of the policy.

Ohman says that purchasing life insurance for a child isn’t the best way to save for college. He reminds us that parents who are putting money towards life insurance premiums for a dependent child could be putting that same money toward their own retirement. “At first blush, it seems like the child’s college education should take priority, but parents would do well to remember that there are many more pathways for a child to get into college (scholarship, grant, student loan, pay their own way, etc.) than there are pathways to having enough money in retirement.”

Another reason why parents take out life insurance policies for their children is to ensure their children will have life insurance in the future, no matter what happens to the child’s health. As Kress puts it: “People buy life insurance for their kids to protect against an illness or future diagnoses that can make insurance more expensive or worse, leave your child un-insurable.”

However, that isn’t always a wise decision. Parents who are worried about their children not being able to provide evidence of insurability as adults may find that their child life insurance policy was unnecessary once the child has become an adult. “You can be left paying very high premium costs for many years only to find that your child may or may not continue with the policy or can obtain their own insurance for a less expensive cost,” Kress explains.

Alternatives to buying life insurance for children

When searching for the best life insurance policy, you’ll find that there are many alternatives to buying life insurance coverage for your children. If you’re looking at life insurance as an accumulation vehicle, you can always open up a traditional, bank savings account instead. If you’re specifically hoping to save for college expenses, a 529 plan, an investment account designed specifically to help pay for education, is an option that is worth considering.

If you’re concerned about your child’s future insurability, keep in mind that there are many life insurance options available for adults, and that your child might have an easier time finding affordable life insurance than you realize. Kress notes that buying juvenile life insurance for insurability reasons “is not our preferred planning strategy since it is impossible to predict.”

If you do want to insure your child, you could consider adding a child rider to a term life insurance policy. A child term rider will provide a death benefit to help cover expenses after a child’s death, which can help families who might have trouble covering funeral costs. Life insurance riders are generally inexpensive, especially compared to a whole life policy, and they aren’t just for children — a guaranteed insurability rider, for example, allows you to purchase additional life insurance coverage amount at certain times in the future and provide a larger death benefit for your beneficiaries. (Note: Riders may be available at additional cost, or may have fees when exercised. Certain conditions will apply to each rider).

Because the person who really needs life insurance coverage isn’t your child — it’s you. As Ohman puts it: “The better insurance product to buy is a life insurance policy on the parent’s lives and not the child’s!” Your family will be the ones dealing with lost income and funeral expenses, and an affordable term life insurance policy can provide your beneficiaries with much-needed financial protection in the event of your death. Compare life insurance quotes and find a plan that works for both your budget and your family’s needs.