Should you buy life insurance for children?

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

Before you become a child life insurance policyholder, find out what two Certified Financial Planner™ professionals have to say about buying life insurance for children – and ask yourself if it’s really worth it, or if there might be other ways to help to ensure your child has the financial resources they need to succeed 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 the death of a child, including funeral costs, there is less concern about how the household will fare financially.

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

Kress suggests that when parents are considering how much life insurance to buy and whether to take out life insurance for a dependent child, they should look at it in the context of wage compensation.

Why some parents buy life insurance for their children

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

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

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

Ohman says buying life insurance for a child isn’t the best way to save for college. He reminds us that parents who put money into life insurance premiums for a dependent child can put the same money into their own pension. “At first glance, it may seem like the child’s college education should be the priority, but parents would do well to remember that there are many more avenues for a child to enter college (scholarships, grants, student loans, self-pay, etc. . . . ) than that there are ways to have enough money in retirement.”

Another reason parents buy life insurance for their children is to make sure their child will have life insurance in the future, regardless of what happens to the child’s health. As Kress puts it: “People buy life insurance for their children to protect against an illness or future diagnoses that could make insurance more expensive or worse, leave your child uninsured.”

However, it is not always a wise decision. Parents who are concerned that their children cannot prove insurability as adults may find that their child’s life insurance was unnecessary once the child was grown. “You can be left paying very high premium costs for many years only to find that your child may or may not be able to continue with the policy or can get their own policy at a cheaper cost,” Kress explains.