Financial Planning and Analysis

Can You Get Life Insurance for a Child?

Uncover the strategic considerations for child life insurance. Learn about its purpose, unique features, and how to navigate policy options.

Yes, you can obtain life insurance for a child. While adult life insurance primarily replaces lost income, child life insurance fulfills distinct financial planning objectives. It generally provides a death benefit for final expenses and can offer benefits during the child’s lifetime.

Understanding Child Life Insurance

Child life insurance policies are typically purchased by a parent or grandparent, who usually assumes the role of policy owner, with the child designated as the insured. Individuals consider this type of policy for several reasons, including securing the child’s future insurability and providing a financial safety net for unexpected final expenses.

The concept of “insurable interest” for child policies differs from that of adult policies. For children, the insurable interest relates more to the emotional and financial impact on the family if an unforeseen event occurs, rather than the child’s direct economic contribution. Policy coverage amounts are generally modest, often ranging from $5,000 to $100,000. This coverage helps to alleviate the financial burden of funeral and burial costs.

Types of Child Life Insurance

There are two primary types of life insurance policies available for children: permanent life insurance and term life insurance.

Permanent life insurance, such as whole life, remains in force for the child’s entire life, provided premiums are paid. These policies feature fixed premiums and build cash value over time on a tax-deferred basis. The cash value growth is typically guaranteed at a minimum rate, providing a predictable financial asset.

Term life insurance, in contrast, provides coverage for a specific period, such as 10, 20, or 30 years, or up to a predetermined age, often 18 or 25. These policies do not accumulate cash value and are temporary in nature. While premiums are generally lower than permanent policies for the same face amount, the coverage ceases if the policy is not renewed or converted. Some insurers offer child term riders as an add-on to a parent’s policy, providing more limited, temporary coverage for all eligible minor children.

Policy Components

Cash value accumulation is a feature found in permanent policies, where a portion of each premium payment contributes to a growing cash reserve. This cash value grows tax-deferred over time, meaning taxes are not typically owed on the gains as long as the funds remain within the policy. The accumulated cash value can be accessed by the policy owner at a later time.

The Guaranteed Insurability Rider allows the child to purchase additional coverage at specified future dates or life events without further medical underwriting. This protects the child’s ability to obtain more coverage later, even if their health changes.

The Waiver of Premium Rider ensures that future premiums are waived if the policy owner, such as a parent, becomes totally disabled. This prevents the policy from lapsing due to an unforeseen financial hardship.

Some permanent policies may also offer dividend options, particularly participating whole life policies. Dividends represent a portion of the insurer’s surplus earnings returned to policyholders. They can be used to purchase paid-up additions, increase policy value, reduce future premiums, or be received as cash. Generally, dividends are not considered taxable income unless they exceed the total premiums paid into the policy.

Policy Acquisition and Management

Acquiring a child life insurance policy typically involves a parent or legal guardian completing the application, requiring parental consent for minors. Underwriting for child policies is generally simplified, often requiring minimal health questions and rarely necessitating a medical examination for standard coverage amounts. The process usually focuses on the parent’s financial standing and insurable interest in the child.

Policy ownership usually resides with the parent or guardian initially. This ownership can be transferred to the child once they reach legal majority, which is typically age 18 or 21, granting them control over the policy. Such transfers may have gift tax implications, though they often fall within the annual gift tax exclusion limit, which is $19,000 per recipient for calendar year 2025.

Designating a beneficiary is an important step, with the parent or another responsible adult typically named. Minor children cannot directly be named as beneficiaries in most jurisdictions without establishing a trust or guardianship. Ongoing management of the policy involves consistent premium payments to maintain coverage. Periodic reviews of the policy are also advisable to ensure the coverage continues to align with the family’s evolving financial needs.

Previous

Is 653 a Good Credit Score & How to Improve It

Back to Financial Planning and Analysis
Next

Can You Have an HMO and a PPO at the Same Time?