Life Insurance Policies for Kids
Insurance companies allow parents and grandparents to purchase life insurance on their children and grandchildren, but some insurers place strict limits on how much insurance you can buy. So life insurance policies for kids are usually small policies. When purchasing life insurance for your kids, make sure you understand how they work.
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Types
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Life insurance for children is normally whole life insurance or universal life insurance. Term life insurance is not normally associated with child life insurance.
Function
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Buying a permanent life insurance policy on a child lowers the total cost of insurance for the life of the policy. When you purchase life insurance on your kids, they are usually at their healthiest. As people get older, the cost of insurance usually rises. However, the cost associated with aging is already factored into policies offered for children, so the premiums remain level. The insurance company can offer level premiums because it has a much longer time to invest those premiums, based on their estimation of how long they think your child will live.
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Benefits
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Premium payments on a child's life insurance policy are relatively low, compared to buying insurance when the child is older. Because most child life insurance policies are permanent policies, the cash value of the policy builds over time. The child can later use this cash value to purchase his first car, for a down payment on his first home or for college tuition expenses.
Disadvantages
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One disadvantage of buying a life insurance policy on your child is that the child doesn't need life insurance in the sense that her probability of death is low. Also, you make premium payments, but when the child turns 18, it is customary for you to turn over the policy to the child. The child may use this money any way she wants. If your kid is a spendthrift, the money could be gone in a relatively short period of time.
Considerations
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If you're going to buy a life insurance policy on your kid, teach him the basic principles of budgeting and how to save money. This will prepare him for a time when he is suddenly in control of a large cash value life insurance policy.
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