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Chris Gash for Money

Kids don’t have incomes, but it can still make financial sense to insure their lives. Before you buy a policy, though, consider a few key aspects of the choice in children’s life insurance.

Getting a life insurance policy for kids doesn't suit every family. Yours might be so well off as not to need such protection, or might prefer to use the money you’d pay in premiums to help pay your kids’ college bills, say, or provide a cash gift to them at a certain age.

For others, though, this coverage can provide peace of mind and protection against the financial costs of losing a child, which would be a burden to cover. I’m one of those parents. For me, the compelling reasons to buy life insurance on my three girls included the desire to protect against the loss of my own income, to pay funeral costs, and to insulate myself against future debts I might inherit were one of my daughters to die.

Most companies allow you to buy life insurance on your children without their knowledge or consent, starting when they’re as young as 14 days old and continuing until they turn 14 years old. The applications typically only have a few health questions and do not require a medical exam.

If you’re even considering such a purchase, here are three important realities about child life insurance policies that will help you to navigate the buying process.

The policy will also be an investment

These child plans tend to be offered as “whole life insurance” policies, meaning they don’t only offer the benefit of life insurance coverage, but also feature a savings component known as the cash value. For example, if you purchased Gerber Life Insurance Company’s $50,000 Grow-Up Plan on a newborn child, the premium would be approximately $35 per month. But rather than all of the premiums going to Gerber’s pockets, the plan would have a cash value that you could realize when you no longer want the coverage, and can even borrow against during the time you hold the policy.

If you wanted simple life insurance coverage on your children, without the savings component, so-called term life insurance might seem like the better way to cover them. Term plans provide coverage for 10 to 30 years, don’t have a cash value, and cost less than whole-life policies.

The trouble is, insurance companies don’t issue term life insurance plans for people who are younger than age 18. Which means if you’re buying life insurance on your child, your only option is a whole-life insurance plan, with its cash value.

The investment return is fairly low

How much cash value build up are we talking about here? Not much. Most illustrations project less future cash value in these plans than the total amount of premiums paid. Indeed, many financial experts criticize whole life insurance plans for their low cash-value returns. In fact, the White Coat Investor estimates the likely return of a whole life insurance policy over 20 to 30 years at just 0-2%.

If your only goal is to provide a financial gift to your children for college or to help them buy their first home, and you don’t care about the actual life insurance protection benefit, I would agree with the critics. You’ll probably get a higher return for your children by investing your money in a 529 college savings plan or Roth IRA.

That’s the case, for example, with the Gerber policy mentioned above. Assuming you bought at the child’s birth, its cash value would reach about $6,000 by the time the child turns 21, after paying premiums that totaled more than $8,000. If you instead invested the $35-a-month premiums in a 529 plan, you’d end up with about $15,000, and that’s with contributions on an annual basis with a modest return of 5% a year.

But that assumes people buy life insurance on their children primarily for its cash value growth, which isn’t necessarily the case. For my part, for example, I saw the savings component of a child’s life insurance policy not as a sole reason to buy the policy, but as an excellent additional benefit. Even if it’s relatively modest, a future cash value of any amount is a nice perk and better than 100% of your money going to the insurance company.

And one that, if the policy is thankfully never used, can provide a little financial boost to children when they are no longer children.

Typically, kids’ life-insurance policies allow parents to gift the cash value to their children when they become adults, and the coverage is no longer needed. For example, children could use the money for education, to buy a home, start a business, or anything else they might need. The policy can also usually be transferred to their children if they want to keep the coverage. Parents might enjoy the flexibility of these funds over, say, holding money in a 529 plan, which must be used for educational expenses only.

Buying a new policy yourself? You can add your children to it

The other way to get some low-cost life insurance on your children is to add a “child rider” when parents purchase a policy on themselves. Most life insurance policies offer this feature at an additional cost of $5 to $7 per thousand (or per unit) of coverage per year and the additional cost typically covers all your children.

For example, say the child rider costs $6.50 per unit per year. If you bought 10 units, or $10,000 of coverage, your annual premium would be $65.00 per year, regardless of the number of children in your household.

The riders vary by company, but most allow you to add your children if they are between the ages of 15 days old and 18 years old with maximum death benefits ranging from $1,000 to $100,000. These child riders do not include the additional benefit of cash value, and usually cover your children to age 23 to 25.

If you’re an adult who is in the market for life insurance, adding a child rider with your policy is definitely going to be the cheapest way to cover your children. But this approach requires good timing, since adults can only add their children at the time they apply for coverage, not after. For this reason, people predominantly use whole life insurance plans to cover their children.

I don’t know of any companies who sell $100,000 policies on children anymore, like the policy I bought. There are several, however, who offer between $5,000 to $10,000 of coverage on the low end, and $40,000 to $50,000 of coverage on the high end. This should be sufficient for most people to cover funeral expenses and a month or two of bereavement pay. As for cost, I’ve seen pricing as low as $3 per month for a $5,000 policy while the average cost is $12 to $14 per month for a $20,000 policy.

Chris Huntley is a life insurance agent, the founder of Insuranceblogbychris, and president of Lifeinsuranceshoppingreviews. The views in this story are his opinion and do not necessarily represent the views of Money.

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