Is Life Insurance for a Child Worth It?

Deciding whether to purchase life insurance for a child is a question many parents consider as they navigate financial planning for their family’s future. This decision involves understanding the distinct features of such policies and weighing them against other financial instruments available for a child’s long-term well-being.

Understanding Child Life Insurance Policies

Child life insurance provides a financial benefit upon the insured child’s death, typically paid to the policy owner. These policies fall into two main categories: whole life and term life, each with different features for coverage duration, cash value, and premiums.

Whole life policies for children provide coverage for their entire life, assuming premiums are paid. They have a cash value component that grows tax-deferred. Policy owners can access this cash value through loans or withdrawals, though this may reduce the death benefit. Premiums are typically fixed and remain level.

Term life insurance provides coverage for a specific period (e.g., 10, 20, or 30 years). A death benefit is paid if the child dies within this term. Term policies do not accumulate cash value and are generally less expensive than whole life for the same initial death benefit. At term end, the policy can be renewed (often at a higher premium) or converted to a permanent policy without new medical underwriting.

Key Motivations for Parents

Parents consider child life insurance for future insurability, cash value growth, and financial preparedness for unforeseen events. A primary motivation is securing future insurability at a young age, ensuring coverage even if health issues arise later that might make it difficult or expensive to acquire.

Another aspect attracting parents to whole life policies is their cash value component. This value grows tax-deferred and can be accessed later for purposes like college expenses, a home down payment, or other significant life events. While accessing it can impact the death benefit, it offers a flexible financial resource.

Parents also consider child life insurance to provide financial protection against a child’s untimely death. The death benefit can help cover immediate expenses, such as funeral and burial costs, which can range from approximately $7,000 to $12,000 for a traditional burial or $6,000 to $8,000 for cremation services. This financial support can help alleviate a significant burden during grief, allowing families to focus on emotional recovery rather than immediate financial strain.

Financial Alternatives for a Child’s Future

Beyond life insurance, other financial strategies exist for parents to save and invest for a child’s future, each with distinct features and tax implications. One popular option is a 529 college savings plan, designed to help families save for education expenses.

Contributions to a 529 plan grow tax-deferred, and qualified withdrawals for higher education expenses are federal income tax-free. Some states also offer tax deductions or credits for contributions, and starting in 2024, unused 529 funds can be rolled over to a Roth IRA, up to a lifetime limit of $35,000, under specific conditions.

Custodial brokerage accounts (UGMA/UTMA) provide another avenue for saving and investing for a child. Assets in these accounts are irrevocably gifted to the child and managed by a custodian until the child reaches the age of majority (typically 18 or 21, depending on the state). Funds from UGMA/UTMA accounts can be used for any purpose that benefits the child, offering greater flexibility than 529 plans. However, earnings are subject to “kiddie tax” rules, meaning unearned income above certain thresholds (e.g., $2,600 for 2024) is taxed at the parent’s marginal tax rate.

For children with earned income, a Roth IRA can be a highly advantageous savings vehicle. Contributions to a Roth IRA are made with after-tax dollars; earnings and qualified withdrawals in retirement are tax-free. For 2024, individuals under age 50 can contribute up to $7,000 annually, or their earned income if less. While primarily a retirement account, contributions can be withdrawn tax- and penalty-free at any time, though earnings withdrawals before age 59½ and five years of account ownership may be subject to taxes and penalties.

General savings and investment accounts, held in a parent’s or guardian’s name, offer maximum flexibility regarding access and use of funds. These accounts do not have restrictions on how the money can be spent, nor are they subject to the kiddie tax rules, as earnings are taxed at the account holder’s rate. Unlike 529 plans or Roth IRAs, they do not offer specific tax advantages for educational or retirement savings. Earnings, such as interest, dividends, and capital gains, are typically taxable in the year they are realized.

Assessing the Value for Your Family

Determining the value of child life insurance involves considering your family’s financial situation, goals, and priorities. Parents should evaluate their existing financial planning, including emergency savings, current life insurance coverage for themselves, and other investment strategies. Weighing the potential benefits of child life insurance, like guaranteed future insurability and cash value growth, against the opportunity cost of premiums is important.

Consider whether funds allocated to child life insurance premiums could generate greater returns or provide more immediate benefits if invested in alternative vehicles. For example, if college savings is a primary concern, a 529 plan might offer more direct tax advantages for educational expenses. If the goal is general wealth accumulation for the child with maximum flexibility, a custodial account or even a Roth IRA for an employed child might be more aligned with those objectives.

The decision also depends on your family’s risk tolerance and desire for financial protection against rare, tragic events. While the financial impact of a child’s death is typically not as significant as the loss of an income-earning parent, some families prioritize covering final expenses and providing a small legacy. Ultimately, the worth of child life insurance is a personal assessment, requiring a comprehensive review of its features alongside other financial tools for your child’s future.