Should I Buy Life Insurance For My Child or Grandchild?

The value of taking out children’s life insurance policies is a highly debatable topic. Some experts provide a few reasons for the argument that child life insurance is not a worthwhile investment. Others allude to the fact that it can be a great alternative in an investment climate characterized by lower interest rates.

How do you decide what’s best for your family? We’re going to educate you on the pros and cons of children’s life insurance, so you have the information you need to make an informed decision.

Financial Protection

Perhaps the best argument against children’s life insurance policies is made by questioning the inherent purpose of life insurance: financial protection. The biggest reason people take out a life insurance policy is to replace lost income in the event of death. It’s far more important and more impactful to focus on the parents’ life insurance policy, as children’s policies rarely replace lost income.

Grandparents and parents commonly make the mistake of insuring children when the worst-case scenario is the loss of one of the breadwinner’s incomes. Many critics advocate for the parents to focus on purchasing insurance for themselves and not fretting over the minimal impact of a child’s policy.

In the argument for financial protection, taking out a life insurance policy on a child doesn’t hold up to more effective and realistic options.

Guaranteed Life Insurance

There’s an interest in taking out life insurance policies on children for the purpose of avoiding rising rates as they age. Many experts argue that unless the child has a medical condition that increases their odds of having high rates when they are older, there’s no need for consideration.

A more practical option would be to add a child rider to the parents’ term life insurance policy, which provides a death benefit, or a lump sum of money to cover funeral costs and other expenses if the parents face the loss of their child. The rider is inexpensive and serves as a viable option that adequately meets the needs of the family if they experience a sudden loss.

As for locking in premiums, most adults don’t find it problematic to obtain life insurance at a low cost when they seek policies in their 20s and 30s. Even so, if a child were to present with a medical condition before the age of 18, parents still have the option to take out a child life insurance policy at the onset of the condition, securing their rates when the need for it becomes more apparent.

Building Cash Value

Parents may find that permanent life insurance policies for their children provide protection, as well as an opportunity for investment. The cash portion earns interest over time and may be based on a predetermined rate, annual profit dividends of the insurance company, or the insurance company’s own investments. Some will guarantee a minimum cash value, while others will not.

When investing in child life insurance policies, you don’t get as many choices as compared to an investment portfolio of mutual funds or index funds. Administrative costs pertaining to the policies might hamper the actual return on investment when there are other, more profitable investment vehicles available. You may want to consider a 529 plan for their education, an IRA, or a custodial account instead.

While other plans present an opportunity for higher returns, the investment in a permanent life insurance policy for children is a slow, gradual, and guaranteed one that appeals to parents who seek predictability of its annual growth. Some may consider the cash value of a life insurance policy to be similar to that of bonds.

A slow growth rate of 3-5% is still an attractive one when comparing to certificates of deposit that have lower rates, for example. The current climate for savings investments involves lower interest rates, and many parents who want to invest without risk will still find life insurance to be a valuable tool.

Bottom Line

The general consensus of purchasing children’s life insurance policies depends largely on your family and specific circumstances. They hold potential to be a good method of saving with stable growth, but there are also other options available to families who want to save for their children’s futures. For the purpose of financial protection, you may consider making your children the beneficiaries of your own life insurance policies before taking out policies of their own.