As a parent you may be too busy ensuring your child eats enough veggies and does well in school to think about taking out life insurance for them. Furthermore, life insurance can be an uncomfortable topic to think about. But life is unpredictable and having a life insurance policy in place can provide financial peace of mind.
Life insurance can help cover funeral costs and secure you financially should you need to take an extended period of time off work. Purchasing a policy early will mean you can lock in low rates, secure your child’s future insurability, and some policies can also act as an investment vehicle for their future.
Keep on reading to find out what child life insurance is and why you might need it.
What is Life Insurance for Children?
With a life insurance policy for an adult, the insured and the policyholder are generally the same person. That is not the case with a life insurance policy for a child. The policyholder here is generally a parent, a grandparent, or a legal guardian. The benefit of purchasing a life insurance policy for your child is that life insurance costs are quite affordable and the payouts are decent.
What Types of Life Insurance are Available for Children?
Life insurance plans for children and babies are usually whole life plans. Which means they provide lifelong coverage and offer guaranteed level death benefits and life insurance premiums. In other words, if you purchase a policy for your child, the death benefit and the premium will remain the same throughout. Compared to life insurance plans for adults, policies for children tend to have smaller death benefits, usually not more than $50,000 to $75,000.
Whole life insurance policies also include an investment component known as cash value. A part of the premium is funnelled into this account, which grows on a tax-deferred basis. The policyholder can tap into the cash value while the child is still alive for any purpose. At a certain age — usually 18 or 21 — your child can take over the ownership of the policy and keep it in force, buy more coverage, or cancel the plan altogether.
Is it Possible to Purchase a Term Life Insurance Plan for Children?
Generally, you cannot purchase a term life insurance plan for a child. As opposed to whole life insurance, also know as permanent life insurance, term life insurance policies last for a specific period and do not accumulate cash value.
However, if you purchase a term life insurance plan on your life, you might be able to add a child term rider that covers the life of your children, depending on your life insurance company. Once your children are of a certain age, they might be able to convert the coverage to a permanent life insurance plan at no extra cost.
Does Your Child Need Life Insurance?
Child life insurance offers several advantages, the most important one being protecting your child’s insurability. If certain health conditions tend to run in the family, like diabetes, buying life insurance for your child might make a lot of sense. This way you can ensure a lifetime of financial security for your child, as they will not lose the coverage even if they develop a medical condition later in life.
Child life insurance could also be a good option if you want to build a financial future for your child. This kind of life insurance policy builds cash value over time. When your child reaches adulthood, they can surrender the policy for its cash value. Or they can keep the policy active and tap into the cash value whenever there is a need.
How Much Life Insurance do You Need for Your Child?
When planning for the unthinkable, it is recommended to purchase a life insurance policy with a payout that covers all funeral expenses as well as time off work for you and the rest of your family. Most life insurance companies will let you purchase a policy that pays between $10 000 and $35 000.
Pros of Life Insurance for Children
Protects Your Child’s Insurability
Your child may be healthy today, but what if they develop a health condition later in life? Or chooses a risky profession or pick up a dangerous hobby?
As an adult, if your child develops a serious illness, they might not be able to buy a life insurance policy. The same might be true if they take up a hazardous occupation (like aircraft pilot) or hobby (like scuba diving). Buying a life insurance policy when your child is young and healthy ensures they will have coverage later in life no matter what.
Moreover, as an adult, they might be able to purchase additional coverage at standard adult rates without having to do a medical exam. Though, not all insurers offer this option. Plus, there may be a cap on how much additional coverage your child can buy once they are an adult. So, make sure you read the details before signing up.
Allows you to lock in a low premium rate
You pay life insurance premiums in exchange for coverage. The life insurance company sets your premium rates based on your child’s age and health. Which means, as an adult, your child will never receive the premium that they could get today. Purchase life insurance while your child is young to lock in low rates for life.
Build a nest egg for your child’s future
Child life insurance policies accumulate cash value over time. A portion of your premium payments is put in an investment account built into the policy. The longer you keep the policy, the greater its cash value. Consider it as a small nest egg for your child’s future.
When your child reaches adulthood, they can take the ownership of the policy and access the cash value whenever they want. Alternatively, they can surrender the policy and receive the accumulated cash value as a lump sum.
Use it to supplement RESP
RESP stands for Registered Education Savings Plan. It is a special savings account that helps Canadian parents to save for their child’s post-secondary education. However, an RESP alone might not be sufficient since there is a lifetime limit of $50,000. Parents can use child life insurance, which comes with a cash value component, or to supplement RESP.
Cover funeral costs
If the unthinkable happens, the proceeds from your child’s policy can help cover expenses like funeral costs and grief counseling. The payout can also compensate any loss of income that you may incur if you take an extended time off work.
Disadvantages of Life Insurance for Children
A low rate of return
Though a whole life plan accumulates cash value over time, its rate of return is lower and administrative fees higher than other investment vehicles. Given the meager rate of return, you might not want to use a child life insurance policy as a substitute for a RESP.
Relatively low coverage limits
Several life insurance companies limit the death benefit for children’s life insurance plans to $75,000. That is far from sufficient for an adult who is looking to cover their debts or secure their family’s financial future. So, once your child reaches adulthood, they will likely need to buy additional coverage.
It is a long-term commitment
Before you buy a child life insurance policy, assess your budget and review your financial situation since you would be paying life insurance premiums for many years. If you are not so sure about your ability to keep the policy active in the long run, adding a child rider to your term plan might make more sense.
How Much Does Life Insurance Cost for a Child?
The younger and healthier your child is when you purchase coverage, the lower the life insurance costs. How much you will pay for a child life policy also depends on the coverage amount. Another factor that comes into play is your payment schedule. Most life insurers give discounts for paying the premiums annually. That said, life insurance costs for children are much more affordable than life insurance costs for adults. Coverage for children can be as low as $3-4 per month and usually aren't more expensive than $10 per month.
Child life insurance is worth considering if you are worried about your child’s future insurability or want to lock in low rates permanently. Since it builds cash value over time, it can help you create a small nest egg for your child.
Dundas Life works with top life insurers in Canada and can help you secure the right coverage for your child at the lowest possible price.