Life insurance for children: What are the coverage options?

Life insurance is a common thing to cross the mind of adults as we look to secure our families in the event we die. A good life insurance policy ensures your debts are paid and your family has the cash to get by without your salary. It also helps your kids pay for college if you’re not around to help.

But what about life insurance for children? Are these policies the same as those for adults? Do kids need life insurance policies? And if so, how do you select and purchase life insurance for kids? We answer all these questions and more below.

Is a child’s life insurance policy different from an adult’s?

Yes and no. A child life insurance policy works like an adult’s policy, so it’s not entirely different. You take out the policy for a specific payout and make the required premium payments. If the unthinkable should happen to the child, the policy will pay out up to its maximum benefit if the premium payments are up to date.

But that’s a slight oversimplification of things, as some distinct differences exist between an adult life insurance policy and life insurance for children. The main difference is that a kid’s life insurance coverage is typically for a small amount, such as a funeral or burial policy.

Parents can also opt for child riders with their existing life insurance company. These insurance riders generally cover each child in a family with up to $25,000 in death benefits.

State laws can come into play when you buy life insurance for a kid. Some states limit the amount of life insurance for kids that you can take out. For example, New York limits life insurance on kids ages 4.5 to 14.5 to $25,000 or 50% of the policy owner’s life insurance, whichever is less.

5 types of life insurance for kids

You have many options when shopping for adult life insurance to secure your child’s future. But there is also life insurance for children. Let’s review the different options and their pros and cons.

Child life insurance riders

Child life insurance riders are a common way to get a small amount of life insurance on a child as inexpensively and conveniently as possible. These add-on policies are quick to add to an existing term or whole-life insurance policy and generally have low monthly premiums, but they also have relatively low payouts that top out at around $25,000.

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Child life insurance rider pros

• Inexpensive

• Quick and easy to set up

• One rider generally covers all kids in a household

• Can convert to a whole policy when the kid reaches adulthood

Child life insurance rider cons

• Limited payout amount

• Doesn’t build cash value

• Lapses if the adult’s policy lapses

Child funeral or burial policy

Sometimes referred to as a final expense policy, a funeral or burial policy helps cover the expense of the funeral or burying a child. These policies are helpful for those on a tight budget because they have relatively low premiums. 

However, with these low premiums also come limited payouts. But because kids are generally not contributing to the household finances, this policy is more to mitigate the unexpected final expenses.

Child funeral or burial policy pros

• Inexpensive

• Easy to obtain

• No stringent qualification requirements

Child funeral or burial policy cons

• Low payout amount

• Requires a separate monthly payment

• Doesn’t build cash value

Child term life insurance policy

A term life insurance policy is a life insurance plan that only lasts for a set period. For example, the insurance policy may cover a child until they reach the age of 18. Each insurance company will have different age policies, so contact an insurance agent for more details.

The great thing about term-life policies is they often are significantly cheaper than whole-life policies because they only offer financial protection for a certain period. They are also cheaper because their active period is during a child’s younger years when the risk of a claim is low. And because of the lower premium, you may be able to opt for a higher payout amount.

Once the coverage term expires, the child’s legal guardian or the child has several options. First, you can simply let the policy expire and lose coverage. Second, if your child is still a minor, you can take out a new term-life policy to extend coverage. Third, if the child is now an adult, they can take out their own term life insurance policy to extend coverage. Finally, you or your child (if they are an adult at this point) can choose to convert the term life policy into a whole-life insurance policy or universal life coverage, if the insurance company offers term-to-whole-life conversions.

Child term life insurance policy pros

• Lower cost relative to a whole-life policy

• Relatively easy approval

• May not require a medical exam

• Can convert into a whole-life policy later

Child term life insurance policy cons

• Coverage has an expiration date

• Higher cost than a rider

• Doesn’t build cash value

Child whole-life insurance policy

A whole-life insurance policy is just what its name alludes to — it’s a permanent life insurance policy that offers financial protection as long as the monthly premiums are paid. Once the policy is in place, your child’s future insurability is not questioned as long as the policy remains in place and is paid on time.

So if your child ends up with an illness that may dramatically reduce their lifespan, the insurance company cannot discontinue the policy as long as it’s paid up. However, if your child attempted to get a policy after learning about this illness, they may find it difficult to secure affordable coverage.

Also, by purchasing a whole-life insurance policy at such a young age, you're getting a lower rate for the coverage amount you chose than if your child attempted to get the same coverage in adulthood. For example, taking out a $1,000,000 whole-life insurance policy on a 3-year-old child may only cost $30 per month, but someone who is 25 or older attempting to get the same policy may end up paying $50 per month or more because they’re at a higher risk of dying sooner.

Also, a children’s whole-life insurance policy builds guaranteed valuable cash value. These cash-value insurance policies split your monthly premium into two pots: one to pay premiums and another to build cash value. You can take a tax-free withdrawal or loan from that cash value if needed. But remember that any withdrawals from the cash value will lower the death benefit.

The issue with whole-life insurance policies is that since the insurance company is on the financial hook for your child’s entire life, the premiums are generally significantly higher than term or rider policies. 

For example, the average $10,000 whole-life policy for a child costs $5.52 to $9.11 per month, whereas a child rider typically adds only $5 per $1,000 in coverage per year, so $10,000 in coverage would cost only $50 annually.

Child whole-life insurance policy pros

• Guaranteed coverage for life (if premiums are paid)

• Lower premiums than if taken as an adult

• Guaranteed cash value

Child whole-life insurance policy cons

• Higher monthly life insurance cost relative to term and rider policies

• May require a medical exam

• Can’t modify the policy terms

Child universal life insurance policy

A universal life policy is similar to a whole-life policy in that it offers coverage for life, making it a great way to ensure your child’s life now and into adulthood. Its key difference is that you can actually adjust the policy to fit your life changes — something a whole-life policy lacks.

So, if you purchase a home and need to increase your coverage for additional peace of mind that the mortgage is covered if you die, you can. Do you prefer a lower premium as opposed to building cash value? You can adjust your premiums to cover only the insurance and no cash value. Are all your debts paid off, and the kids have left home? You can lower your coverage only to cover funeral expenses and save on monthly premiums.

It’s this flexibility that makes universal life insurance policies beneficial.

Child universal-life insurance policy pros

• Flexible coverage that changes with your needs

• Coverage for life

• May build cash value

Child universal-life insurance policy cons

• Cash value not guaranteed

• Generally higher premiums than a whole-life policy

How can I buy life insurance for children?

Buying life insurance for children is not much more complex than buying it for yourself. It’s all about understanding any laws limiting your purchase and your options. You already know what policy types are available and what may suit you, but you’ll need to look into local laws to see if you can only buy a certain amount of life insurance for kids in your area.

If you have no legal limitations, you can start by determining the type of insurance that’s best for your situation. If you’re on a tight budget and only concerned with final expenses, a funeral expense or child rider policy may be your best option. A child term-life policy may be best if you prefer more coverage at a lower cost than a whole-life policy. 

However, a whole-life or universal policy may be best if you want to guarantee your child has access to a life insurance policy into adulthood with lower premiums than if they took out a policy when they’ve reached adulthood.

If you opt for anything other than the child rider policy, your next step is to shop around for child life insurance quotes. The child rider policy won’t require quotes because you can only get this as an add-on to your existing life insurance policy.

Contact a handful of the best life insurance companies and get quotes. Keep in mind that it’s not all about getting the best rate. You’ll also want to consider the company’s reputation and financial stability. You can find out more about these variables with online research.

Once you find the perfect child life insurance policy, complete all the required paperwork and medical exams, if required, and pay the required premiums to start the policy.

If you’re unsure which policy is best for your child, contact a life insurance agent or a financial planner to help you decide.

Life insurance is just one way to secure your child’s future

By purchasing life insurance for your child, you’re at the very least protecting yourself from the expense of the unthinkable. When it comes to securing your child’s future, a life insurance policy is just one option. You can also set up a savings account, a custodial brokerage account, or other accounts to help your child begin saving and building wealth.

The Greenlight app can also help your child secure their financial future by helping them build financial literacy, save, and even learn to invest. Give the Greenlight app a spin today.