Appendix B: Life Insurance for Children
Should you purchase life insurance on your children? To some people, the very idea is distasteful. For those people, they can simply avoid the subject. For the rest of us, why would we purchase life insurance on our kids?
The answer is less insurance and more financial and personal. People purchase life insurance on their children as a financial gift for when their older, and a head start on their personal insurance. It also guarantees their future insurability – no matter what happens to their health as they grow older, an existing policy remains in place even if no new insurance can be purchased.
However there is a financial component to insurance on children. A common arguement against life insurance on children is that they’re not earning an income and thus have no need for insurance. However in the event of the death of a child we do have loss of income – yours. Loss of a child in my experience often leads to being off work for 6 months to many years – and that’s a loss that can be insured.
The first way to purchase life insurance on your children is as a Childrens Protection Rider, detailed in the Riders section. This provides limited amounts of coverage with limited features, but is the least expensive way to get a small amount of insurance.
The second way is to purchase an individual policy. However, there’s some additional considerations for children’s policies that differ from your insurance. First, people may want to have the policy become ‘paid up’ or have no more premiums when the child is older. Secondly, you may be concerned about increasing the coverage over time. These two concerns lead us to different product selections than a typical life insurance need.
First, since we’re locking in insurability for the child, you would be looking at a permanent policy instead of term. Whole life policies are normally the permanent policy of choice, because in addition to being permanent, they address the following concerns as well.
Next, to ensure that you can pay for the policy when the kids are young, then gift them a policy with no further premiums when they’re older you would look at a ‘quick pay’ policy. Some whole life policies let you change the premiums structure from ‘level for life’ to ‘pay for 20 years, then nothing after that forever’. This would be called a 20 pay whole life policy. So if you want to pay the premiums yourself while your children are young, and then gift them a policy with no premiums when they’re older, a quick pay whole is the way to accomplish this.
Lastly, you may consider that you want an increasing amount of coverage. This is particularly valuable if they become uninsurable – the increasing coverage may be the only new insurance they can get in the future. With a whole life policy you would look at a policy with paid up additions. These policies have a feature called ‘dividends’ which are not guaranteed but are generally a refund of premiums based on the policy’s performance. These dividends then automatically purchase paid up additions which are simply little whole life policies that get added to the base policy. This continued addition of new paidup additions happens without a medical exam.
The result of all of this is that a typical life insurance policy for children would be a 20 Pay Participating Whole Life policy with paid up additions. That gives you permanent coverage, premiums that are over in 20 years, and generally increasing coverage.
On a personal note, I did purchase insurance on my children when they were younger – and am thankful that I did. My daughter had a mild brush with cancer in her early 20’s, rendering her uninsurable. The policy I purchased is currently the only life insurance she has as she’s become married and taken on a mortgage. Unlike what most people choose, however I selected a term to 100 cost of insurance universal life with level premiums for life – I wanted inexpensive level premiums, and didn’t value increasing coverage (I simply purchased a higher coverage amount to start) or paid up premiums (as I expect to continue to pay the premiums myself for the forseeable future).