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Life Insurance for Kids: How Does It Work?

Nov 15, 2022 | Insurance, Life Insurance

Parents want what’s best for their children throughout their lives. Many parents see taking out a life insurance policy on their children as a way of continuing to support their children and their legacy if they pass away.

Is a child’s life insurance policy the right option for you? Take a moment to consider why life insurance for kids can be a wise idea for many Canadian families.

The choice to purchase a life insurance policy that covers your child is a complicated one that involves financial planning, social expectations, your relationship with your children, and other factors. In many cases, you won’t know until much later whether you made the right decision, but you can take the time now to make the best decision you can for the unforeseeable future.

This guide to life insurance for kids will help you understand the basics of life insurance and the implications of your choice to insure your child or children, should you pursue that option. If you have more questions about children’s life insurance policies, contact us at Alliance Income.

The Cost of Children’s Life Insurance Policies

The cost of a child’s life insurance policy is, in most cases, lower than a policy for an adult since children have a longer life expectancy.

A child’s life insurance policy in Canada can range from a few dollars a month up to $50 per month based on the type of coverage, amount of coverage, and your child’s health. 

Many websites have online calculators that parents can use to estimate the cost of child term life riders and whole life policies. Each insurer will have different options and calculate premiums differently.

Keep in mind that the estimate that you obtain from an online calculator might not be the same as a rate quote that you would get from any particular insurance company. 

A child’s life insurance policy might cost less if:

  • The policy is a term insurance policy rather than permanent (whole) life insurance.
  • The policy is bundled with a parent’s life insurance policy.
  • The child is young.
  • The child is in good physical health.

Do not focus exclusively on cost when evaluating life insurance for kids. Consider the amount of coverage and your goals in purchasing the policy.

The Role of Life Insurance

For many people, the decision to take out a life insurance policy for themselves or their partner stems from a desire to protect dependents if they lose a provider or caregiver. Minor children do not have dependents, which raises the question of why a child would need life insurance. Some parents worry that purchasing life insurance coverage for their children will cause them to profit if their child should die.

However, life insurance serves other functions beyond financial support. For these roles, a child’s insurance policy can be suitable and beneficial.

Let’s consider each of these situations in turn.

  • Providing emergency funds for final expenses when a parent loses a child
  • Providing the child with a life insurance policy that they can use as an adult
  • Saving for a child’s future financial needs
  • Letting your child avoid the hassle of taking a physical exam to get life insurance

Benefits of Getting a Life Insurance Policy for Children

No question, it’s difficult to have this thought process, especially because all a parent dreams of  for their child’s life to be filled with learning, joy, growth and excitement. But when you are ready to wrap your head around the benefits of securing a life insurance policy for your child, here are some reasons why it’s a good idea:

Support in the Event of a Tragedy

While the loss of a child is thankfully rare in Canada, parents who face the tragic loss of a child often lack the time and mental energy to keep track of financial expenses. They also might face mounting medical or legal bills and other financial hardships, depending on the circumstances of the child’s passing.

A funeral or burial life insurance policy for a child allows parents the space to grieve without having to worry about where the money will come from. Parents will have the resources to provide a fitting memorial and funeral service for their child.

Investment in the Future

The cash value that accrues with a whole life insurance policy can provide your child with a nest egg that they can put towards:

Protecting Your Child’s Future Insurability If a Medical Condition Develops

Some medical conditions raise the risk of life insurance policies to the point where the child might not be eligible to take out a new life insurance policy later in life at an affordable rate. Having an existing life insurance policy with a level premium means that your child won’t have to worry about the premiums going up as they age or if they develop a medical condition later in life. More often than not, in Canada, medical expenses are covered, however there are still some situations where parents would have to absorb the cost of certain expenses related to an unforeseen event.

Limitations of Insurance Policies for Children

Each of the reasons to buy a life insurance policy comes with caveats and considerations that parents should keep in mind. As with many financial decisions, the ultimate decision involves striking a balance between the pros and cons.

Other Investments Might Be More Profitable

Whole life insurance policies have the advantage of being relatively safe investments that offer returns higher than some savings and money market accounts. However, other investment vehicles might offer higher returns, such as stocks, mutual funds, and real estate investment trusts.

If you are saving for your child’s future, you might consider a specialized savings account, such as a Registered Education Savings Plan. A savings and investment plan can include multiple investments, including a whole life insurance policy.

A Grown Child Might Be Able to Find Coverage as an Adult Despite Having a Medical Condition

Having a medical condition such as HIV, obesity, or asthma might make it more difficult for the child to get coverage and increase their premiums. However, the obstacles might not be insurmountable.

  • Future treatments for medical disorders might reduce the child’s risk.
  • Your child might make lifestyle changes as a teen or adult that will improve their health
  • Your child might not have dependents as an adult or might not need a life insurance policy for other reasons.

The cost of paying premiums for life insurance through your child’s formative years adds up. If you worry that your child might need life insurance at a later date, weigh the costs of a child’s life insurance policy against the alternative of investing the money instead and giving it to the child as an adult to pay for medical or life insurance costs.

The Process of Applying for a Child’s Life Insurance Policy

You can purchase life insurance for your child in one of two ways: taking out a new policy or adding on to your existing life insurance policy. 

If you add to your existing policy, your insurance company will add a rider to your current policy. You might be able to get a better rate from your current insurance company by bundling the policy with other types of health insurance.

Another option is to purchase term life insurance as a standalone policy with a different insurance company. This could be an attractive option if you do not have other forms of insurance or if your current insurance company does not offer a child’s policy that meets your needs.

If you don’t have life insurance currently and are looking for children’s life insurance, ask about bundles that include life insurance for you, your children, and other family members that your children depend on. Comprehensive protection for your child should support your child in the event of an emergency, and that includes the loss of a parent or caregiver. 

If you buy a new life insurance policy, you will likely have many options. Working with an insurance broker can help you find the right type of policy with an insurance company that is a good fit for you and your family. Insurance brokers have established relationships with Canadian insurance companies. They can often negotiate low rates and have access to a wider range of insurance options than individual customers searching on their own.

Is There a Medical Exam Requirement?

Fortunately, you will not have to get a physical examination for your child. You will have to provide information about your child, including their medical history, before the insurance company will underwrite the policy. Before you apply for a policy, you should have access to the medical records of the child’s family members.

Are There Eligibility Requirements for Life Insurance Coverage for Children?

Insurance companies have different age requirements for children’s life insurance policies. You might have to wait 16 days or more after the child is born. Heritable conditions might make children ineligible for life insurance coverage. Be honest about your child’s medical history because omissions or inaccuracies on the application could result in your child losing coverage.

Converting a Child’s Life Insurance Policy

A child’s term life insurance policy will often end at a certain point specified in the policy. However, policyholders have the chance to convert the term policy into a permanent life insurance policy, increasing the premiums but giving the child an investment toward their future.

Many policies specify that the policyholder has to convert the policy at a particular point, such as when the policyholder reaches a certain age or passes away.

Types of Children’s Life Insurance Policies

The different life insurance policies work in different ways and serve different needs. Choose a policy that fits your reasons for choosing a policy.

Term Life Insurance

Term life insurance provides coverage for a particular length of time or until your insured child reaches a certain age. Term life insurance has no cash value, so it is not useful as a way to save for your child’s future.

The primary benefits of term life insurance for children are to cover expenses if your child passes away before the term is over and to give the child a chance to extend the policy and gain term coverage at lower rates.

Whole Life Insurance

Whole life or permanent insurance does have cash value and is a way to provide your child with a financial nest egg. The premiums will be more expensive for whole-life policies, which could impact your child’s decision to cash out the policy or continue to pay premiums once they grow up.

How Long Should Child Term Life Insurance Be?

Term policies often last for decades with common terms for child policies being 10 or 20 years. Ownership of the policy might transfer to the child at a certain age, typically 21.

Be aware of any milestones that trigger a change in your policy. Let your child know about them as they get older so they can prepare for any decisions that they need to make.

Should Children Continue to Maintain a Childhood Insurance Policy into Adulthood?

It is impossible to know what your child’s circumstances or needs will be a decade or more down the road. However, knowing that the policy is there if your child needs it can give you peace of mind and give your child greater financial security.

How To Choose the Right Type of Life Insurance Coverage for Your Child

It is a good idea to speak with a professional in the insurance industry before purchasing an insurance policy. 

Insurance brokers do not sell insurance directly. Instead, they help insurance companies connect with potential customers whose needs match the type of insurance they provide.

A broker can save busy parents from spending time researching all the different types of life insurance for kids in Canada.

How Much Coverage Should a Child’s Life Insurance Policy Provide?

Insurance experts recommend a policy of $10,000-$20,000 dollars to pay for a funeral, burial or cremation, and other end-of-life costs. Many insurance companies don’t issue children’s policies with values higher than $75,000 because the child does not need to support anyone.

Is Whole Life Insurance a Good Investment for Children?

One common reason parents buy life insurance for kids is to provide a financial lifeline for their children as they enter adulthood. Forbes Advisor considers whole life insurance for kids to be a potentially worthwhile investment, particularly for parents who earn enough to afford to reliably make payments for decades. 

Parents benefit the most from whole life insurance if they provide a diversified investment for their children, including more aggressive investments and education savings accounts. A typical child’s whole life insurance policy will not pay out enough to make ends meet if the now-grown child has to support a family.

Buying Life Insurance for Adult Children

The owner of an insurance policy does not have to be the insured person’s partner or their dependent. As long as your adult child agrees to it, you can buy them a life insurance policy. Your child would have to provide their medical history and undergo a physical exam just as they would if they bought a policy for themselves.

Buying life insurance for kids after they grow up is a good option if they have children of their own or a dependent spouse but cannot afford to pay for a policy.

Buying Life Insurance for Children With Disabilities

If you are the parent of a child with a disability, buying a life insurance policy for them while they are young is a wise idea. Depending on their medical condition and life experience, they might have difficulty getting insurance at an affordable rate.

Even in Canada, which has resources available for people with disabilities, adults with disabilities may face more financial challenges than their non-disabled peers. The challenges they face will grow as they start families and have children. 

A life insurance policy from childhood allows people with disabilities to provide financial security for their own partners or children if their medical status makes them ineligible for a new life insurance policy in the future.

What Questions Should I Ask When I Talk to an Insurance Broker?

Given the complexity of life insurance for kids and the long-term commitment that goes along with buying an insurance policy, it can be a mistake to rush into the decision without answering questions. Whether you add a rider to your existing plan, talk to insurance companies directly, or go through a broker, ask questions before you buy. 

Don’t move forward with a purchase unless you are confident that your insurance provider understands your needs and that you understand the terms of the policy that the insurer is offering.

Ask the following questions when you have the opportunity to consult with a broker or insurance representative.

  • Why do you believe this insurance policy is right for my child?
  • How does this policy compare to my other options?
  • Will I be able to change the terms of this policy at a later date? If so, under what conditions?

Conclusion

A child’s health insurance policy can give you and your child financial protection if your policy matches the long-term needs of your family. Alliance Income is a trusted company with a history of providing quality life insurance for kids and adults, along with other types of insurance.

Let Alliance Income help you explore your options. Use the form on the Alliance Income website to tell us more about your child. We will send you a competitive rate quote.

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