As a parent, you want to do everything you can to protect your child, both now and in the future. That includes having enough life insurance to cover their needs in the event of your death. But the tough question is, “How much life insurance will you really need for your child?”
Well, it depends on a number of factors, including your child’s age, your financial situation, and your goals for their future.
Taking these factors into account, in this article, we will discuss how to determine how much life insurance you need for your child. We will also provide tips on choosing the right life insurance policy and getting the best price.
How Much Life Insurance Do I Need for My Child? Overview
The amount of life insurance you need for your child depends on a number of factors, including:
- Your child’s age. The younger your child is, the less life insurance you will need. This is because your child has more time to earn their own income and save for their future.
- Your financial situation. If you have a large estate, you may not need as much life insurance for your child. However, if you have a small estate or if you are in debt, you will need more life insurance to ensure that your child is financially secure in the event of your death.
- Your goals for your child’s future. If you want to leave your child enough money to cover their college education or to start a business, you will need more life insurance than if you simply want to leave them enough money to cover their funeral expenses.
How Much Life Insurance Should You Get for Your Child?
There is no set amount because everyone’s goal for insuring their child is different.
For example, if you are purchasing child life insurance to cover final expenses, the coverage provided by a rider may be adequate. You can add a rider to your existing life insurance policy for about $2.50 per month. This will provide you with $10,000 to $15,000 in coverage if one of your children dies. This sum should cover the majority or all of the funeral expenses.
However, if you have lost a child, you will most likely require time off from work. Unless you have an unusually large amount of vacation or sick time, you may need some extra money to cover your bills while you grieve. A standalone policy with a $50,000 death benefit would cover funeral expenses as well as a few months off the job.
A higher coverage amount may be justified if you are concerned that your child will require an expensive medical bill or treatment. A larger cash benefit could assist in paying off any outstanding medical debt. Many whole and universal policies allow you to add living benefits to your child’s life insurance policy. This coverage can assist with treatment and other associated costs.
Finally, if you intend to give this policy to your child when he or she is an adult, you should get the most coverage possible. Again, rather than a rider, this would be most easily accomplished with a standalone child life insurance policy.
Is Life Insurance Required for My Child?
There are various types of life insurance policies available to meet a variety of needs. Child life insurance works in the same way that adult life insurance does, but the application is slightly different. Most adults use life insurance to cover final expenses and to replace the deceased’s lost income.
“Does my child really need life insurance?” you may wonder. Before dismissing it, remember that a death benefit isn’t the only reason parents should consider life insurance for their children.
- Guaranteed Insurability: As a child, contracting an illness or condition can impact your child’s ability to purchase life insurance for the rest of his or her life. Purchasing life insurance for a child when he or she is young ensures his or her insurability as an adult.
- Low Cost: Our premiums rise as we age. Child life insurance premiums are low. This is an excellent opportunity to obtain life insurance at the most affordable price your child has ever seen, especially if you choose a whole-life policy with a fixed premium.
- Funeral Costs: Funeral costs are often at the top of a person’s list of expenses when they die. When it comes to your child, however, your needs may outweigh the immediate cost of a funeral and burial. Many parents buy life insurance to cover expenses such as bereavement counseling, missed work, and any outstanding debt, such as college or car loans.
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- Medical Bills: Everyone wishes for a healthy life for their child, but things can go wrong. When they do, the cost can be prohibitively expensive. Living benefits are available in many life insurance policies. This money is available in the event of a terminal or chronic illness. These accelerated benefits can assist in the payment of medical treatments and other related costs.
- A Gift: A policy with accumulating value can contain a large sum of money by the time your child reaches adulthood. Life insurance is an excellent gift for an adult child, especially if they keep the policy until retirement.
If you have given your child a policy with an accumulating cash value, they can borrow against it in times of need. They need a down payment for a car, house, or honeymoon; they can use their policy to get a low-interest loan. It is tax-free and does not require a credit check because the policy serves as collateral for the loan.
How to Get Life Insurance for Your Children
There are two options for purchasing life insurance for children:
#1. Stand-Alone Policy
There are two types of permanent policies to consider. Whole-life insurance is the first. Whole life insurance is a type of permanent life insurance that has fixed premiums and a guaranteed cash value. The premiums are fixed for the duration of the policy. This means they are the same price when your child is 17 as when he or she was 6.
Dividends are a financial component of these policies that can increase the policy’s value. When an insurance company makes a profit, cash dividends are paid to policyholders. They can be used in a variety of ways, including:
- Used to provide a premium discount
- Received in the form of a cash payment
- Left to increase the policy’s cash value
However, this stability and versatility result in higher policyholder premiums.
A universal life insurance policy is the second type. You can customize your coverage and premium amounts with this type of life insurance policy. You can choose benefit amounts based on your current needs and make changes along the way to match your current goals or your child’s circumstances. Like whole life insurance, they usually have a cash value component. The cash value can be depleted depending on what adjustments or borrowing you do.
#2. A Child Rider
You or the child’s other parent can add children’s life insurance to an existing adult life insurance policy. This is known as a child rider. What’s great about this option is that it can be used to cover all of your children at once, whereas stand-alone policies require you to buy a policy for each child you want to insure. In general, this is the most cost-effective way to insure your children.
The disadvantage is that you may not be able to select the high level of coverage that you could with a separate policy. Another notable difference is that riders frequently die at the age of 25. The specifics of your policy determines the age. Most riders, thankfully, allow children to convert their rider into an adult permanent life insurance policy.
The Benefits and Drawbacks of Child Life Insurance
Consider these three popular features when deciding if child life insurance is right for you.
#1. Ensures future insurability
A guaranteed purchase option is typically offered in or included in child life insurance policies. This means that the child can purchase additional coverage without having to take a life insurance medical exam.
The additional coverage available varies by policy, and the ability to purchase more may be limited to specific ages or life events such as marriage.
- Pros: This feature can be useful if the child develops a chronic health condition such as diabetes or chooses a dangerous career such as firefighting. People with health issues or who work in dangerous occupations typically pay much more than the average cost of life insurance.
- Cons: You can’t tell if your child will ever need life insurance. Healthy applicants in their twenties are more likely to secure competitive rates, so if you believe your child will not require life insurance due to a pre-existing condition, a child life policy may not be required. The coverage amounts are insufficient to cover a future life insurance need.
Coverage is typically issued at a standard (i.e., non-preferred) rate class, which means it is more expensive than coverage available if your child is in good health at 18.
#2. Serves as a vehicle for your child’s savings
You can take money out of your cash value account or borrow against it. When the child reaches the age of majority, they can surrender the policy and receive the full amount. If you borrow a large sum from the policy, your child may end up owing income tax on a phantom gain in the worst-case scenario.
- Pros: The funds can be used to cover expenses such as school fees or a down payment on your child’s first home. It also grows tax-deferred, which means you don’t have to pay taxes on the profits until you withdraw them.
- Cons: Life insurance cash value accounts are dependent on you paying premiums and can take a long time to grow. Because the premiums are relatively low, the cash value will be low. If saving for your child is your primary goal, you should consider other types of investments first.
#3. Covers expenses if the worst should happen
Losing a child is heartbreaking, and you may incur unexpected expenses. As long as the premiums are paid, child life insurance policies pay out a lump sum in the event of a death.
- Pros: The payout can be used to cover expenses such as burial costs or grief counseling. It can also assist in covering the costs of running a business if you are the owner and need time off.
- Cons: According to the Centers for Disease Control and Prevention, it is relatively uncommon for a child to die in the United States.
As a result, the risk of not having coverage may outweigh the cost of the policy. Set up a rainy-day savings account with three to six months’ worth of income.
What You Should Know Before Buying a Child Life Insurance
Before purchasing a policy for your children, consider your budget and your own life insurance needs. In general, your own life insurance policy is more important than your child’s because it can help cover your family’s living expenses or other expenses if you die.
Here are some scenarios in which getting a policy for your child makes sense:
- Your child is a successful actor, model, or social media personality.
- Your child is working part-time to help with household expenses.
- Your child looks after younger siblings and provides the type of assistance you would need to outsource otherwise.
Instead of purchasing separate coverage for your children, you may want to consider adding a child term life insurance rider to your existing policy. When the term expires, you may be able to convert child riders to permanent coverage in some cases. These riders are not available from all insurers, and coverage amounts may be limited.
Alternatively, if your employer provides group life insurance, you may be able to purchase supplemental life insurance for a child or spouse. Group life plans, on the other hand, are typically linked to your employment, which means that if you leave your job, you may lose your coverage.
Life insurance is an important way to protect your child’s financial future. You can choose the best life insurance policy for your child and get the best price by following the tips above.