Why Get Life Insurance for a Child?

The idea of purchasing life insurance for a child might seem unconventional to many parents. Life insurance is often associated with income replacement for adults, protecting dependents from financial hardship following the loss of a primary earner. While child life insurance does not serve this traditional purpose, certain forward-looking considerations lead some families to explore this option. It addresses specific long-term financial planning objectives and provides security for unforeseen circumstances.

Securing Future Coverage

Purchasing life insurance for a child at a young age can ensure their future insurability. As individuals age, health conditions can develop that could make obtaining life insurance difficult or expensive. A policy secured in childhood often includes provisions, such as a guaranteed insurability rider, allowing the child to purchase additional coverage as an adult without further medical examinations or health questionnaires.

This rider permits increases in coverage at specified intervals or life events, such as marriage or the birth or adoption of a child. Securing a policy early also locks in premium rates based on the child’s young age, which are the lowest possible. These rates remain level for the policy’s duration, providing cost predictability and significant savings over a lifetime, regardless of future health changes.

Accumulating Financial Resources

Certain types of child life insurance, particularly whole life policies, include a cash value component that accumulates over time. This cash value grows on a tax-deferred basis, meaning that earnings are not subject to income tax as they accrue within the policy. This allows the cash value to compound more efficiently compared to taxable accounts, fostering long-term growth.

The accumulated cash value can be a financial resource accessible later in the child’s life. It can be accessed through policy loans or withdrawals, providing funds for significant life events. Policy loans are tax-free, provided the policy remains in force and the loan amount does not exceed the premiums paid into the policy. Withdrawals are tax-free up to the amount of premiums paid, but any gains withdrawn above that amount are taxable as ordinary income.

These funds might assist with expenses such as college education, a down payment on a home, or starting a business. The policy must adhere to Internal Revenue Code Section 7702, which defines what qualifies as a life insurance contract for tax purposes, ensuring tax-advantaged growth and access to funds. If a policy fails to meet these criteria, it could be reclassified as a Modified Endowment Contract (MEC), which may result in taxation of loans and withdrawals.

Addressing Immediate Financial Needs

Life insurance on a child provides financial protection to parents in the tragic event of their child’s passing. This benefit can help alleviate a financial burden during a difficult time. The death benefit from such a policy can cover various immediate expenses.

These expenses include funeral and burial costs, which can range significantly across the United States. A traditional funeral with burial costs between $7,000 and $12,000. Cremation services incur lower costs, often ranging from $5,150 to $7,000. Beyond these direct costs, the policy can also help with other unforeseen expenses, such as medical bills not covered by health insurance, or professional counseling services for grieving family members.