How Much Life Insurance for My Children Should I Buy?

Every parent wants to protect his or her child. Looking after their health, well-being, and future is all part of the job. As the custodian of this responsibility, you may have decided that your family needs life insurance. After all, life insurance can offer valuable protection, be used as a financial tool, and of course, cover expenses in the event of a tragedy. But one of the dilemmas many adults face is determining how much life insurance they will need. If you are wondering, “How much life insurance for my children should I buy?” we can help. Let’s review some tips to figure out the coverage needs each of your dependents has.

Explaining Life Insurance for Children

Traditionally, life insurance is a contract between the insurance company and the policyholder. In exchange for paid premiums, the insurance company promises to pay a cash benefit to the beneficiary named on the policy at the time of death of the policy holder. Life insurance policies are usually purchased to protect family against the loss of income that would result if the policyholder passed away, but child life insurance is meant to cover the costs of a child passing away, which could be almost $10,000. The policy provides a measure of financial security for survivors if they would not be able to afford those expenses otherwise.

Do I Need Life Insurance for My Child?

There are all kinds of life insurance policies that can be used to satisfy a variety of needs. Child life insurance works the same way life insurance does for an adult, but it differs slightly in its application. Most adults use life insurance to cover final expenses and to replace the lost income of the deceased. Although children do not have any income to replace, a death benefit can be used to cover funeral expenses.

Can you afford funeral expenses for your child in the face of an unfortunate event? You may be asking, “Does my child really need life insurance?” Before you decide against it, you should know that a death benefit isn’t the only reason parents should consider life insurance for their children.

• Guaranteed Insurability: Contracting an illness or condition as a child can affect your child’s ability to buy life insurance for the rest of his or her life. Buying life insurance when a child is young guarantees his or her insurability as an adult.
• Low Cost: As we age, our premiums increase. Premiums for child life insurance are low. This is an opportunity to grab life insurance at the most affordable rate your child might ever see, especially if you choose a whole life policy with a premium that will not increase.
• Final Expenses: When a person dies, funeral costs can be at the forefront of expenses. But when it’s your child, your needs can outweigh the immediate cost of a funeral and burial. Many parents purchase life insurance to help with bereavement counseling, missed time from work, and any outstanding debt, like leftover college or car loans.
• Medical Bills: Everyone hopes for a child to live a healthy life, but things can go wrong. When they do, the expense can be overwhelming. Many life insurance policies feature living benefits. This money can be accessed in the case of a terminal or chronic diagnosis. These accelerated benefits can help pay for medical treatments and other related expenses.
• A Gift: By the time your child reaches adulthood, a policy with accumulating value can contain a large sum of money. Life insurance makes a great present to an adult child, especially if they hold on to the policy until retirement.
• Financial Tool: If you have gifted your child a policy that has accumulating cash value, they can borrow against it during a time of need. Let’s say they need a down payment for a car, house, or honeymoon; they can take a low-interest loan from their policy. It is tax free and does not involve a credit check because the collateral of the policy is what secures the loan.

How to Purchase Life Insurance for Children

Purchasing life insurance for children can be done one of two ways:

1. Stand-Alone Policy

There are two main kinds of permanent policies to choose from. The first is whole life insurance. Whole life is a permanent life insurance policy with fixed premiums and guaranteed cash value. The premiums remain unchanged over the life of the policy. This means they cost the same when your child is 17 as they did when he or she was 6.

These policies also have a financial component that can increase the policy’s value: dividends. Cash dividends are paid to the policy holder when the insurance company reports a profit. They can be used a variety of ways:

• applied as a premium discount
• received as cash payment
• left to increase the cash value of the policy

All of this stability and versatility, however, means higher premiums for the policy holder.

The second kind is a universal life insurance policy. This type of life insurance policy allows you to customize your coverage and premium amounts. You may select benefit amounts based on your current needs and make adjustments along the life of the policy that match your current goals or child’s circumstances. They generally have a cash value element, like whole life insurance. Depending on what adjustments or borrowing you do, the cash value can be depleted.

2. A Child Rider

Life insurance for children can be added on to an existing adult life insurance policy that you or the child’s other parent carries. This is called a child rider. What’s great about this option is that it can be used to cover all of your children at once, whereas with stand-alone policies, you would need to purchase a policy for each child you’re interested in insuring. Generally, this is the most affordable way to insure your children.

The trade-off is that you may not be able to elect the high level of coverage you could with a stand-alone policy. The other notable difference is that riders often expire at age 25. The age depends on the specifics of your particular policy. Thankfully, most riders allow children to convert their rider into an adult permanent life insurance policy.

How Much Life Insurance to Buy

For example, if you are purchasing child life insurance to cover final expenses, then the coverage that a rider provides may be sufficient. For about $2.50 per month, you can add a rider to your existing life insurance policy. This will give you about $10,000 to $15,000 worth of coverage should one of your children pass. This amount should be enough to cover most or all of the funeral costs.

However, after the loss of a child, you are likely to need time off work. Unless you have an unusual amount of vacation or sick time, you may require some extra cash to cover the bills while you grieve. A stand-alone policy with a death benefit of $50,000 would provide enough coverage to pay for funeral expenses and a few months off the job.

If you fear that an expensive medical bill or treatment may be necessary for your child, then a higher coverage amount may be justified. A larger cash benefit could help cover any outstanding medical debt. Many whole and universal policies have the option to add living benefits to life insurance for children. This protection can help with treatment and other associated costs.

Finally, if your goal is to gift this policy to your child when he or she is an adult, then you may want to take the highest amount of coverage you can get. Again, this would be most easily done through a stand-alone child life insurance policy rather than a rider.

HealthMarkets Can Help

If you need help deciding the coverage type or amount to purchase for a child, let HealthMarkets assist you. One of our licensed agents can help you decide how much life insurance makes sense for your child. Call (800) 827-9990 today to get help, or visit us online to learn more about life insurance for children and all of our life insurance products.