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Should You Buy Life Insurance for Your Grandchild? (Probably Not)
You’ve probably seen those Gerber Life Grow-Up Plan commercials.
For a low monthly payment, you can purchase a permanent life insurance policy for your child or grandchild. It builds cash value, and can provide them with life insurance when they become an adult.
But does buying life insurance for kids ever make sense?
After all, the main purpose of life insurance is to financially protect dependents — babies and toddlers don’t have those.
And even though premiums are low, you have to keep paying them indefinitely or risk losing coverage — along with all the money you’ve already paid into the policy.
We break down life insurance for children, including the average cost, drawbacks and potential benefits so you can decide for yourself.
Often purchased by parents, guardians or grandparents, child life insurance provides coverage for minors. These policies are usually permanent life insurance policies that provide a fixed payout to the beneficiary if the insured child passes away while covered.
Some people also purchase these policies as a long-term savings vehicle, since they usually accumulate a cash value over time.
Life insurance coverage amounts are usually modest, often below $50,000, and the premiums remain fixed, meaning they don’t increase over time.
The death benefit paid out by child life insurance can be used to cover funeral expenses or any other costs.
When the child turns 18 or 21, most insurance companies will transfer ownership of the permanent life insurance policy into the child’s name. Life insurance coverage can remain in place so long as the adult child continues making premium payments.
Children’s life insurance policies are usually whole life insurance policies, a type of permanent life insurance. This means the policy remains in effect for the rest of the child’s life so long as premiums are paid.
A whole life insurance policy combines a death benefit with a cash value component that grows over time. Part of the premium payments contributes to the cash value, which accrues interest and can be accessed later in life.
You can generally purchase a whole life insurance policy for a child when he or she is just 14 or 15 days old. Insurers cap the maximum age you can purchase a policy for a minor; it usually ranges between age 14 and 17.
Adult life insurance policies are typically owned and paid for by the policyholder. However, children’s life insurance policies are owned and paid for by parents or guardians. Parents are usually the beneficiaries as well.
Another difference is that children’s life insurance policies usually don’t require medical underwriting to qualify for coverage.
Finally, the death benefit tends to be smaller for child life insurance policies.
Generally, you can expect to pay roughly $10 to $30 per month for whole life coverage for a child.
The exact amount you’ll pay depends on several factors, including the insurer, the coverage amount and the age of the child.
You’ll pay more for a larger death benefit, for example, while premiums are usually lower for babies than teenagers.
The Gerber Life Grow-Up Plan boasts that premiums start as low as $3.70 a month for a child less than 1 year old. However, it only provides up to $5,000 in coverage. A $25,000 policy costs just under $17 while a $50,000 death benefit costs $33.85 per month.
A quote from Mutual of Omaha priced a $20,000 policy for a 1-year-old at $8.22 a month. The price increased to $19 a month for $50,000 of coverage. The same amount of coverage for a 10-year-old costs $26.75.
Just a reminder: An 18-year-old in good health can likely find a 30-year term life policy for less than $30 a month with a much higher death benefit.
Parents, grandparents or legal guardians can purchase child life insurance policies. Some policies may also allow other family members, such as aunts or uncles, to buy life insurance coverage for the child.
Buying life insurance for a child is a straightforward process. Since there’s usually no medical exam, it’s typically faster and easier to buy life insurance for a child than it is for an adult.
Here are the general steps to obtain life insurance for a child.
Before you buy life insurance for your child or grandchild, it’s important to understand the pros and cons.
Life insurance for children doesn’t make sense for most people. In many cases, the premiums paid into the policy will far exceed any potential benefits received.
If you want to protect your child’s future, it’s worth exploring other investment options, such as college savings accounts, high-yield savings accounts or adding your child to your own life insurance policy.
If your primary concern is covering funeral expenses for a child, you can consider adding a rider to your existing life insurance policy instead of purchasing a separate policy for the child. This option is usually more cost-effective.
These riders are extensions of either parent’s life insurance policy and provide a small death benefit if your child passes away.
Child riders are often more affordable, and they can usually be converted into a separate policy for your child when they reach adulthood.
When it comes to children’s term life insurance riders, there is usually little to no underwriting involved. This means your child doesn’t have to undergo a medical examination to get covered.
However, insurers may ask a few health-related questions. Children with certain pre-existing conditions may not qualify for coverage.
Typically, children are covered under a life insurance rider until they reach a certain age (usually 22 or 25) or get married, whichever comes first.
A 529 plan is specifically designed to save for future higher education costs, including college tuition, fees and books.
Most 529 plans offer a range of investment options, from stock and mutual funds to pre-built portfolios. The growth of the account value depends on the performance of the chosen investments.
Contributions to 529 plans grow tax-free. Withdrawals for qualified educational expenses are also tax-free. Some states also offer tax deductions or credits for contributions to their 529 plans.
You can find information about your state’s 529 plan by checking this College Savings Plan Network tool created by the National Association of State Treasuries.
Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) accounts allow parents and grandparents to hold investments on behalf of a child until they reach the age of majority (usually 18 or 21, depending on the state).
Funds can be used for any purpose that benefits the child. It’s not limited to education expenses only.
Investment options for custodial accounts can include stocks, bonds, mutual funds or even real estate, depending on the financial institution holding the account.
Custodial accounts can be opened at banks, credit unions, brokerage firms and online investment platforms.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer at The Penny Hoarder. She focuses on retirement, investing, life insurance and taxes.
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