What Happens to a Child’s Term Rider at Its Age Limit?
Understand what happens when a child's life insurance rider reaches its age limit and how to ensure continued coverage & future insurability.
A children’s term rider functions as a temporary life insurance policy attached to a parent’s or guardian’s main coverage, providing financial protection for a child. This article explains what occurs when a child reaches the predetermined age limit of such a rider.
Understanding Children’s Term Riders
Children’s term riders offer a limited amount of life insurance coverage for a child as an add-on to an adult’s primary life insurance policy. These riders are structured as “term” policies, meaning they provide coverage for a defined period, usually until the child reaches a specific age, such as 18, 21, or 25. Parents or guardians often purchase these riders to help cover potential final expenses or to secure the child’s future insurability. One rider generally covers all eligible children, including current and future biological, adopted, and stepchildren, often without an increase in premium for additional children. The death benefit from a child rider is typically paid out as a tax-free lump sum to the policyholder.
The Age-Out Event and Initial Outcome
Children’s term riders are designed to “age out” when the covered child reaches a specific age, which is predetermined by the policy and often ranges between 18 and 25 years. At this point, the term coverage under the rider automatically ceases for that child. The rider typically includes a “conversion privilege.” This privilege allows the child, now an adult, to convert the term coverage into a permanent life insurance policy without needing to undergo a medical examination or provide evidence of insurability.
Exercising the Conversion Privilege
The conversion privilege allows for the transformation of the temporary term coverage into a permanent life insurance policy, such as whole life or universal life insurance. A primary benefit of converting is the guaranteed insurability, meaning no medical underwriting is required. This ensures the individual can obtain coverage even if their health has deteriorated since the original rider was issued.
The option to convert must typically be exercised within a specific timeframe. The premium for the new permanent policy is determined by the child’s age at the time of conversion, the type of permanent policy chosen, and the face amount of the new coverage. While the conversion itself is generally not considered a taxable event by the IRS, any loans taken against the cash value or withdrawals from the policy could be subject to income tax, though death benefits from life insurance policies are generally received tax-free.
Considerations for Long-Term Coverage
When the child’s term rider ages out, evaluating whether to exercise the conversion privilege or pursue alternative life insurance options is an important financial decision. Factors such as the individual’s current health status play a significant role. If the individual is in excellent health, purchasing a new policy might offer more competitive premiums than a converted policy, as new policies can be underwritten based on current health.
Financial considerations, including the individual’s budget for premiums, should also influence the decision. Permanent policies obtained through conversion generally have higher premiums than new term policies due to their lifelong coverage and potential cash value accumulation. Future life insurance needs, such as covering potential student loan debt, providing for a future family, or establishing a long-term financial asset, should guide the choice.