Life Insurance for Children: Is It a Necessary Purchase?

They say there's nothing like meeting your child for the first time. The world expands and pretty much instantly, you know you'll do everything in your power to set your precious little bundle up for success - physically, emotionally, academically, and yes, financially, too. This explains, in part, why parents choose to get life insurance for children.

It makes sense, right? It can serve the purpose of financial protection if something happens to your child and be used as a method of saving for your little one's future. 

But is it really the best way to secure a child financially? Maybe not. 

In this article, we'll go over how life insurance for children works and why your new family member doesn't likely need their own coverage. We'll even look at better ways to use what would be a monthly premium to save for your child instead!

Key Takeaways

  • Life insurance for children can be purchased in a few different ways. You can get term life insurance (a plan that ends after a set term), whole life insurance (a lifelong plan), or a child rider
  • While there are some pros to this kind of coverage, it's mostly unnecessary. You only need life insurance if you have financial dependents, and you aren't relying on your children for their income
  • There are better uses of a monthly premium as a way to save for your children. You can put aside a monthly deposit into a traditional savings account or start an emergency fund for your child, to name a few

Life Insurance for Children: How Does it Work?

Life insurance for children works the same way as it does for adults. You put a life insurance policy in place and, in the event of that person passing away, beneficiaries receive a death benefit in the form of a monetary payout.

There are a few options that are commonly available as life insurance for children: a term life insurance policy, whole life insurance, and something called a child term rider. 

A term and whole life insurance policy for children function nearly the same way as they do for adults. With term life insurance, your child is covered for a set term. With whole life, your child has coverage that goes from birth to death. 

Unlike getting life insurance as an adult, children are not required to undergo a medical exam to qualify for insurability. It's important to note that if your family has a history of medical conditions, this may be grounds for a provider to deny your child coverage.

Another option is the child term rider. A rider is basically an add-on to your current life insurance policy for a small monthly fee. This provides guaranteed coverage for all of your children until they're adults, at which point they can convert their coverage into an individual plan if they choose to. 

It is cheaper to tack on a rider to your current life insurance policy than it is to purchase life insurance for children outright. And while both types of insurance come with a cash value, life insurance doesn't yield as high a return compared to other types of investments. 

Nonetheless, this doesn't stop parents from purchasing life insurance for their children. "If a parent had some money, and they wanted to do the best they possibly could for the children, they're generally thinking long-term, of getting the kids off to university," says Lorna Eastman, CFP and president of Lorna Eastman Financial in Victoria, B.C.

The Pros and Cons of Life Insurance for Children

It's important to take a step back and weigh the benefits of getting life insurance for your child. Here are some of the reasons people consider life insurance for children, and why these reasons aren't all they are cracked up to be.

For most, this reason is enough of a con to encourage parents to look at different savings methods. Life insurance is meant to be a security blanket for financial dependents. If something happens to you, what happens to those who rely on you financially? Realistically, children contribute lots to a home, but money isn't one of those contributions.

You wouldn't be put in a financially difficult situation if the unthinkable happens and your child passes away. Why pay for protection on a non-existent financial risk?

2) It Doubles as a Savings Plan - but Not by Much

Permanent life insurance policies come with a savings component. When you put your money in a life insurance plan for your child, that money grows with interest over time. You're not taxed on the interest until you withdraw cash or surrender the policy. 

The money you receive from a life insurance plan can later be used for anything, including tuition fees. Many parents consider life insurance as a savings fund for education. 

However, it takes a long time for these returns to grow into a significant amount before they become useful. Plus, administrative fees are high and ultimately eat into your policy's cash value. Withdrawing cash for tuition incurs fees and reduces the death benefit.

While it might sound like a good idea to have an insurance and savings plan in a single pot, the reality is much less impressive. You guaranteed higher returns by putting that money in a traditional investment account or an educational savings plan.

3) Life Insurance for Children is Cheap - but the Benefits are Limited

When you get a life insurance policy for your child, you lock in a rate that stays the same throughout their term. And because life insurance policies for children are relatively cheap, this means you pay for lower premiums overall.

However, the scope of coverage you get with a child's life insurance policy is limited. By the time they're an adult, your child will likely need to buy more coverage to adequately protect themselves and their future family.

It's also worth noting that life insurance is extremely affordable if you purchase it as a healthy young adult. There's a level of comfort in locking in a low rate for your children, but they will be able to do that in the future. 

Think of it the same way you would if you buy something just because it's on sale. If the purchase wasn't a need, you didn't truly save anything.

4) It Can Guarantee Future Coverage - But if Your Children Are Healthy, They Can Easily Get Coverage Later

One thing parents consider when looking at life insurance for the children is the fact that some plans allow for instant approval in the future.

If you know your family has a history of health conditions that your child is likely to inherit, getting a life insurance policy for them early on is a good idea. If not, the chances of them being denied coverage later are low.

It's also not difficult for young adults to get affordable life insurance in their 20s or 30s. You don't want to pay decades for a premium now, that will likely only benefit them with additional coverage later.

5) It Serves as an Emergency Fund for One Type of Emergency

With a life insurance policy on your child, you become the beneficiary of a death benefit that pays out if your child passes away. You can use this death benefit to cover medical and funeral expenses, counseling, and replacement income should you need to take time off from work.

However, life insurance only kicks in after death. Thankfully, the chances of your child passing away are low, so you wouldn't ever see this money. Plus, there's a whole host of other events that come up in the course of a child's life that have surprise expenses attached to them. With an emergency fund, you can pay these bills more easily, without having to pay for withdrawal fees on a child's life insurance.

If you value the financial security of life insurance policies in an emergency, you shouldn't pay for a completely separate policy. For a cheaper cost, you can get the same benefits by adding a child term rider to your own policy.

The Best Ways to Prepare for Your Children's Financial Future

Getting life insurance for your child is not a bad idea per see. However, you can make better financial moves that protect your children the same. Here are some of them.

1) Set Up a Traditional Savings (and Investment) Account

As a parent of grown children, Eastman says she'd rather establish a long-term, easy savings plan that's accessible and does not cost her too much money.

Opening a high-interest savings account on behalf of your child is one way to do that. Not only will it yield greater returns over time, but it's also easy to set up and access. Over time, you can contribute as much you want, as often as you want to this account.

You can also deposit monetary gifts from family and friends. When you gift the account to your child when they're older, they can use the cash to buy a life insurance policy of their own - with some extra to spare.

Similarly, your child will benefit more from a traditional investment account that grows significantly over time.

2) Take Advantage of Government Grants to Save for Your Child's Education

For parents in Canada, the Registered Education Savings Plan (RESP) lets you save and invest money for your child's post-secondary education. 

In an RESP, investments grow tax-free. Your child will only be taxed for the income they receive from the RESP once they're in university, and since the income bracket of students is low, so is the tax on RESP payments.

The federal government also adds 20% of your contribution to your child's RESP with the Canadian Education Savings Grant (CESG). You can get up to $7,200 in total CESG.

Additionally, there's the Canada Learning Bond (CLB), which the government contributes to the RESP of children from low-income families. 

The best part about an RESP is that even small contributions make a big difference over time. "Once you have that awareness and ability , it's not hard," says Eastman. "It can really help a lot, more than you expect."

Depending on where you're located within Canada, there are benefits available at the provincial level as well. In British Columbia, for example, there's the B.C. Training and Education Savings Grant (BCTESG), which the provincial government deposits into the B.C. child's RESP account. In Ontario, there's the Ontario Student Assistance Program (OSAP), which provides financial aid for college or university. 

3) Secure Your Own Life Insurance First

One of the best ways to protect your children's financial future? Have your own life insurance policy in place. 

As a parent, you want to know your children are taken care of in case something happens to you. This is why it's more important for you and your partner to have life insurance policies. Having coverage for yourself is one of the best ways to protect your children's financial future.

Not only will this cover medical bills and funeral expenses in case of your death, but it also ensure your children's daycare services, education, and other expenses are paid after you're gone.

With your own life insurance policy, you can add on term riders that cover all of your children until they're adults. This is easier to get and much cheaper than a life insurance policy for a child.

4) Create Emergency and Rainy Day Funds

Should money get tight in the future, you don't want to have to surrender your policy in exchange for cash, or get charged for cash withdrawals that reduce your benefits. Consider building an emergency fund and rainy day fund for things that pop up unexpectedly, like last-minute replacements for school-related technology. These funds give you greater control and, when stored in a high-interest savings account, yield greater returns.

Final Thoughts on Life Insurance for Children

Every family is unique, and each family's needs are different. So, it's always worth looking at your options. However, for the most part, your time is better spent looking at other vehicles for savings, not life insurance for children. 

Ultimately, life insurance is meant to protect your loved ones who are financially dependent on you. While there is no price tag that can be put on the emotional toll of losing a child, you do not rely on their income. And if life insurance is meant as a savings method for your child, there are better options available.

There are a lot of tough choices to make as a parent. Luckily, life insurance for children isn't one of them.