When you become a parent, at some point you will be solicited to purchase life insurance on your children. But should you?
Before you consider purchasing a life insurance policy for your child, it is recommended each parent have enough life insurance themselves. Additionally, many experts recommend other financial objectives are met first including having a fully-funded emergency fund, regular contributions to a retirement plan, and debt under control.
Once parents have their financial affairs in order, then the following considerations can be used to help determine if purchasing a life insurance policy on a child makes sense.
Insurability – Premiums for life insurance at determined using actuarial tables which consider factors such as age and health. Most insurance companies will not ask any health-related questions for very young children. This means you will guarantee your child will have life insurance for their family even if they happen to develop a condition which could make the cost unaffordable years in the future.
Lock-in costs – Actuarial tables also use a person’s age to determine the life insurance premium. Because coverage is being purchased at such a young age, the cost of a life insurance policy for a child is extremely low. By purchasing life insurance at such a young age, your child should have little trouble affording the premiums when they take over the policy and use it to protect their family in the future.
Investment potential – Most life insurance policies for children are either whole or universal life contracts. These policies have a cash value or investment component associated with them. This money can be used in the future for such things as tuition or down payments. One benefit of cash value is it grows tax-free and is only taxed when withdrawn.
Provides funds in worst-case scenario – Child mortality rates are exceptionally low. Purchasing life insurance solely to pay for final expenses is not generally a recommended reason to buy such coverage. However, if a life insurance policy is in place if you lose a child, final expenses, grief counseling, and unexpected costs can be paid from the life insurance policy’s benefit amount.
Before you purchase life insurance on a child, speak with us so you can get the guidance of a trained life insurance agent. There are a variety of options available to you and selecting the right policy today will make all the difference in the future.