You know that life insurance is an important part of your financial plan. Life insurance is designed to help your family move forward if you should die an untimely death. You can also purchase a life insurance policy on your partner so that if your partner passes on, you have a way to cover expenses, debts, and other costs that might be a part of your life moving forward.
But what about purchasing life insurance for your kids? Does that ever make sense?
Insurance Rider for Your Child
Rather than purchasing life insurance on my son, I have an insurance rider on my own policy. It doesn’t cost very much, but it’s nice to have. While no one likes the idea of a child passing on, the reality is that sometimes it happens. The rider I have for my son is enough to cover funeral expenses. I don’t need a big payout if my son dies, but the rider ensures that if the unthinkable does happen, I won’t have to come up with money for funeral costs on top of managing my grief.
What About Grow-Up Plans?
Another possibility are grow-up type plans that you can purchase. These life insurance policies can provide you with peace of mind as well, and give you enough of a payout to cover funeral expenses. Many of these plans also build cash value.
In many cases, these types of plans are designed to revert to the child later on, if you that is what you decide to do. The child can cash in the policy and use the money to help pay education expenses (although, depending on the policy, the cash value might be just enough to buy books). It’s also possible to let the child change the beneficiary. This is more about establishing that your child has had life insurance for years, and this can help later if some sort of eligibility issue comes up, or if your child becomes un-insurable for some reason.
These plans are inexpensive, and they have their place, depending on your financial situation, and your concerns about the future.
A Large Life Insurance Policy on Your Child
For the most part, it’s not necessary to purchase a large life insurance policy on your child. Smaller policies designed to protect you against funeral costs might give you peace of mind, but you probably don’t need a $500,000 policy on your child.
The main exception to this rule is if your child is earning income for your family. In some cases, children do make money that helps support the family. Your child might be an actor or model. Additionally, with the rise of online businesses, there are also more young entrepreneurs. Your teenage son or daughter might start a website that earns money, and becomes a significant source of income for your family.
If this is the case, and you begin to rely on your child’s income, you should consider a larger insurance policy. Just as you purchase life insurance on yourself so that your family is provided for in the event of your death, you need to consider what your family would do without your child’s income. This is a depressing way to look at it, but it’s also the realistic way to approach the issue.
Remember, though, that if your child is earning for the family, you need to make sure you are following legal procedures. That money is still your child’s; you are likely a custodian. You can charge some management fees and other costs for your time and trouble, but, for the most part, the money your child earns has to be managed mainly for his or her benefit, and it has to be managed in such a way that he or she has something to access upon reaching the age of majority.
Even in this case, however, it can still make sense to insure your child’s life. You want to be prepared for the unexpected, and if you have grown to rely to some degree on your child’s income, a larger life insurance policy makes sense.
Bottom Line
In most cases, you probably don’t need a major life insurance policy for your child. However, it usually doesn’t hurt to get a smaller policy or a rider to your own policy that covers your child’s life. That way, you can address funeral costs without breaking the bank, and enjoy a little peace of mind.
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