Life Insurance for Children: a Complete Guide

October 19, 2021
financial literacy

We all lose sleep at night thinking about the kids in our lives. 

We worry about their financial future, their health, and the choices they’re making now that will impact their lives for years to come. 

That’s why you owe it to the children in your life to do everything you can now to help them build a promising financial future.

One of the ways parents, grandparents, and other relatives choose to invest in that future is by selecting a life insurance policy for the children in their lives. 

But life insurance benefits aren’t only about building a financial legacy for future generations — they can also be used in the here and now as investment tools to help kids pay for college tuition, get on the property ladder, and more.

This guide explains how life insurance for children works, the best types of life insurance for children, and how you can use a custodial account alongside life insurance to build a strong financial foundation for the children you love.

How Does Life Insurance Work?

Before we dive right into life insurance for children and how to choose the best type of life insurance for the kids in your life, let’s take a step back and explore how life insurance works.

Life insurance is a common insurance product that you’ll see quite a lot on the market. 

At its core, life insurance is essentially just a contract between an insurance company and a policyholder. That contract guarantees that some amount of money will be paid out to named beneficiaries if and when the insured policyholder dies.

That guarantee of payment is made in exchange for premiums that are paid by the policyholder over the course of their lifetime. This usually takes the form of a monthly payment.



For example, let’s say you’re a parent, you’ve got two kids, and you take out a $500,000 life insurance policy for yourself. 

Your insurance company might ask you to pay a monthly premium of $750 every month, and you’d probably want to name your children as the policy’s beneficiaries.

You’d keep paying $750 per month until your death — and when you ultimately pass away, the insurance company will pay the $500,000 out to your children.

Of course, there are different types of life insurance products and plans, and they don’t all work quite the same way. 

What are the different types of life insurance?

There are two basic life types of life insurance: term life insurance policies and permanent life insurance policies (or whole life insurance policies).

Term life insurance covers a policyholder for a set amount of time — and it basically works the same way as a car insurance or home insurance policy. 

You, as the policyholder, are required to pay a premium each month. Then if something bad happens during the term of your policy, a benefit will get paid out.

With a term life insurance policy, you can expect to see two basic components: a death benefit and a premium.

The death benefit (or face value) of your term policy is the amount of money that your insurance company promises to pay out to your beneficiaries when you (or the person insured) die. Most insurance companies will allow you to select the death benefit amount of your policy based on the estimated future financial needs of your beneficiaries.

Next, you’ve got your premium. 

A premium is the amount of money that you, as the policyholder, must pay for the insurance coverage. If you don’t keep up with your premiums, then your insurer won’t be obligated to pay out the death benefit to your beneficiaries later.

The value of your premium is typically worked out by the insurance company based on your life expectancy, the policy term length, and the amount of coverage you’re looking for.

That’s all you can expect with term life insurance policies. But if you go for a permanent life insurance (or whole life insurance) policy, you can expect a third component: cash value.

Rather than simply covering you for a set amount of time, permanent life insurance covers you until the day you die — as long as you’re staying up-to-date on your premiums. 

That’s one of the key benefits of a permanent policy, but a lot of people also choose this type to gain access to the cash value element.

The cash value component of a life insurance policy is essentially a savings account that the policyholder is allowed to use over the course of their lifetime. A policy’s cash value can also often be used to pay premiums or purchase add-ons to the policy. 

Because you, as a policyholder, can enjoy the use of the cash value component of your policy while you’re still alive, this is often referred to as a “living benefit”.

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Life insurance for children

Although getting life insurance is more common among adults, getting life insurance for children is becoming an increasingly popular route. 

Adults want to help safeguard the finances of the children they love and any future family members that pop up down the road, and life insurance can be one way to do this.

Life insurance for children works basically the same way as policies for adults. 

Generally, you can either take out a permanent policy for the kids you love, or you can place one or more kids onto your existing adult life insurance policy as an add-on. We’ll break down more on the logistics of that in just a second. 

But no matter which type of coverage you go for, you’ll be empowering your children with the power of lifelong insurance coverage and setting a foundation upon which they can build future coverage. 


With most policy types, the insured child will become the policy owner when they turn 21. 

That means they will be responsible for paying the premiums instead of you to keep the policy going. 

If you’ve gone for a permanent policy type, the insured child will then be able to borrow from the policy’s cash value that you’ve accumulated while they were a minor.

Or, they can choose to surrender the policy and receive the accumulated cash value to spend as they wish.

Can you Get Life Insurance for a Child?

The short answer is: yes, you can definitely get life insurance for a child. But the way you go about insuring a child will depend on the policy type you choose, as well as the rules or options available from your existing insurer.

There are quite a lot of insurance providers out there that will be willing to provide you with an individual life insurance policy for the kids in your life. 

That would mean you’d be paying the premium on their policy, and it would be independent of any other policies you’ve taken out for yourself or anybody else.

But a lot of insurers will also give you the option of taking your existing policy and adding a “rider” that specifically covers the children in your life too. If you’re not up-to-date on your insurance jargon, a “rider” is just a fancy word for an add-on.

The question you may be asking yourself at this point is: why get child life insurance? 

Taking out a child life insurance policy is a great way to safeguard your family’s finances down the line.

Parents, grandparents, or other relatives will often choose to take out a life insurance policy for children as a way to invest in that child’s financial future. After all, by getting a child covered early, you’ll be locking them in at a fairly low rate.

By that, we mean that insurers typically give you more expensive rates based on your age and lifestyle. But most insurers don’t generally have a physical requirement for children to fulfill if you’re taking out a policy on their behalf. 

table of average life insurance cost for males by age group
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Ordinarily, if a child were to develop serious health conditions later in life or go into a dangerous profession like training crocodiles or washing the windows on skyscrapers, insurers wouldn’t want anything to do with those kids. They would essentially be uninsurable.

But if you invest early on, it doesn’t matter from an insurance point of view if the kids you love develop an illness or want to live a life of danger. 

They’re already covered — which means the benefits that go hand-in-hand with the child’s life insurance policy are already in place.

Not only does that save you money in terms of future premium payments, but it should give you peace of mind to know that they’ll always be covered no matter what.

What’s the Best Type of Life Insurance for Children?

If you decide to purchase life insurance for a child, the vast majority of adults pick a permanent (or whole life) insurance policy.

By selecting a permanent life insurance plan, you’ll be able to ensure the policy is built to last the entire course of a child’s life. 

Meanwhile, a term insurance policy would only last for a set amount of time — so you might not get quite as much peace of mind in knowing your family will be ok.

That being said, there’s another reason that most parents, grandparents, and other relatives go for a whole life insurance policy when trying to insure the kids they love.

As we’ve already mentioned, permanent life insurance policies don’t just come with a death benefit. They’ve also got a life benefit in the form of cash value. 

As you build up the cash value of a life insurance policy over time, you’ll be able to accumulate a higher value that your loved ones can then end up using as a savings account or rainy day fund.


Think about it: over the course of a child’s life, they’re going to run into a lot of major expenses. 

Maybe they want to pay off student loans, get a downpayment for a first home, pay for a wedding, or start a business. If you want them to be able to use the investment you’ve made on their behalf while they’re still alive, cash value is a great way to invest in their financial future.

The cash value living benefit component of a life insurance policy is also helpful because it grows on a tax-deferred basis. That means the money you put into a life insurance policy can accumulate without you having to worry about paying taxes on that savings.

Your child can then borrow against the cash value of their policy to pay for all the expensive things in life like college tuition, family emergencies, or even just to supplement their future retirement income.

That being said, it’s critical to bear in mind that most insurers treat this borrowing like a loan. That means if the cash benefit a policyholder takes out isn’t replaced before they die, then the outstanding amount will be subtracted from the death benefit (plus interest). 

Failure to pay interest on any borrowed cash value amount can sometimes result in your policy getting canceled.

At the end of the day, getting life insurance for children is a great way to offer kids future financial security. 

But If you want to supplement the cash value investment you’re generating — or create this sort of living benefit for the children you love using a policy without cash value — one of the best solutions is to set up a custodial account.

What is a custodial account?

A custodial account is a flexible investment vehicle adults can use to save money for a child to spend when they reach the “age of majority”. In most states, that age is either 18 or 21, and the way custodial accounts work is pretty simple.

The adult setting up the account acts as its “custodian” until the child comes of age, making them responsible for the investments in the account. 

When the child hits the age of majority in their state, the custodianship ends, and everything in the account passes into the ownership of the now-grown child.

A key benefit of custodial accounts is that they’re taxed at the child’s lower rate. 

But just like the cash value of a life insurance policy, the cash ultimately withdrawn from a matured custodial account can be used however the kids in your life want to use them.

The only difference is that, unlike a life insurance cash value, the money a grown-up child takes out of a custodial account isn’t a loan that must be repaid. Everything in the account belongs to them — which adds a little peace of mind in knowing your loved ones won’t bite off more than they can chew in borrowing.

Conclusion

Getting life insurance for children can be a great way to invest in their financial future. 

Getting a policy for a child is fairly simple, doesn’t normally require a physical, and can help lock down a great rate with lower premiums.

Just make sure to do your homework and shop around to find a policy type with benefits that suits your investment style and the child’s future financial needs.

If you’re wanting to create the same type of living benefit for the kids you love without having to worry about loan agreements and having to go back and forth with insurers, one of the easiest solutions is to set up a custodial account.

Want to learn more about how you can start investing for the kids you love? Download the EarlyBird app now.

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