Pros and Cons of Buying Life Insurance for Kids

If you’re a breadwinner, it’s likely you either own or plan to buy life insurance to protect your family’s income. And if you’re a parent, you might have also heard about juvenile life insurance policies, which are available to anyone under age 18 and pay a benefit in the event of a death of a child.

But if your third grader’s earnings consist of the money she makes from her lemonade stand, is it really necessary to buy her a life insurance policy?

It depends on whom you ask, and what your personal needs are. Critics say only a small percentage of families would actually benefit from juvenile life insurance. But advocates contend there are several advantages and that the policies are best used as an investment that the child can take over as an adult.

Before you make a decision, there are a few factors you should consider.

Who’s buying it

Roughly 350 million Americans, including 250 million adults and 100 million people under age 18, buy juvenile life insurance policies, according to the Limra, an industry research trade association. From that, there are 40 million individuals covered. Parents or grandparents usually purchase these policies through their life insurance companies.

Ownership rates for juvenile life insurance peaked at 57 percent in 1976 and declined to a low of 31 percent in 2010, but rates are now increasing, according to Limra. In 2016, the life insurance ownership rate among children under 18 was 40 percent, with 25 percent owning individual policies and 22 percent having group coverage.

How it works

There are three types of juvenile life insurance:

1. Juvenile permanent life insurance:

Just like an adult policy, this coverage is permanent — as long as premiums are paid — and grows in cash value each year. This is a whole life insurance policy and pays out a lump sum in the unlikely event of a child’s death, but it can also be used as a savings tool that the policy owner can access through a withdrawal or low-interest loan. A parent or grandparent owns this policy until the child turns 18 and can assume ownership. Annual premiums for whole life policies cost about $3,600, according to Guardian Life Insurance Company of America.

2. Juvenile term life insurance: 

This is a much less expensive option and is available as a rider parents can add to their own term life insurance policy. Adding a unit of $1,000 of coverage through a term rider costs about $5 a year.

3. Juvenile group life insurance:

Some employers offer this option through their group life coverage, although you usually can’t take it with you if you leave your employer.

Policy pros

According to Limra, there are a host of reasons why families might benefit from purchasing juvenile life insurance. Permanent policies include a death benefit plus a savings component. So in addition to being able to cover expenses in the event of an unexpected death, a juvenile life policy can also be used as an investment vehicle if the child does not die prematurely.

Here are a few ways policyholders can benefit.

Covering final expenses:

“If a child does die, there are funeral expenses and those sorts of things to think about,” says Elaine Tumicki, corporate vice president and director of Limra Product Research. The average funeral costs $7,000 to $9,000.

Saving for future expenses

Because tragedy is rare, most families never need to tap into their child’s life insurance policies, and children assume ownership of their policies after they turn 18. That means parents can use their children’s whole life insurance policies to build money when the child becomes an adult and needs to pay for life events such as college tuition, or a wedding, car or home.

Maintaining a low cost of coverage

Certain health conditions can make it expensive to obtain life insurance. But by getting a policy as a young person, you can keep your rate low, explains Jim Scanlon, senior research director for Limra Market Research. “The earlier in life you get life insurance, the cheaper it’s going to be for you as you get older. So that’s a nice benefit,” he says.

Locking in insurability

When individuals apply for insurance, they must go through an underwriting process to determine whether they qualify for a policy, or if they are too great a risk. When a person is insured from birth, it’s unnecessary to go through that process again as an adult. “It’s one thing to get coverage at a good cost. It’s another thing to get coverage at all,” Scanlon says.

Juveniles covered through a term rider on their parents’ policies may also have an opportunity, upon reaching adulthood, to convert that term coverage to permanent coverage without going through underwriting.

Investment benefits and tax savings

Some insurers guarantee that juvenile policies will continue to accumulate cash value regardless of what is happening in the financial markets.

And since life insurance gets preferred tax treatment, it can be a savvy way for households with a higher income to make sure that income becomes available to them, Scanlon says.

“A lot of different types of households can benefit from juvenile life insurance,” he says.

Policy cons

Bob Hunter, director of insurance for the Consumer Federation of America, says juvenile life insurance is an unnecessary expense for most families. 

“Life insurance is meant to help with the economic consequences of a premature death,” Hunter explains. “Losing a child brings emotional damage. That’s not economic damage.”

The death of a child is rare, Hunter says, and very few children earn an income large enough to support a family. “I used to say that unless your child is Macaulay Culkin, you don’t need it,” Hunter says.

Even if a child becomes gravely ill, medical expenses would be covered by health insurance, not a life insurance policy, Hunter points out. A life insurance policy on the child might allow parents to pay off hospital bills after a child has died. But he says families would be better off putting their money toward a good health insurance policy instead of juvenile life insurance.

Consumers should be wary of when marketers play into parents’ love for their children in an attempt to peddle more policies, Hunter says. “Love and fear sell life insurance,” he says. “Sometimes that’s good. If you’re the breadwinner and you’re afraid you’re going to die, then you should buy life insurance. But you don’t need it for your baby.”