As a child, life insurance is likely the furthest thing from your mind. However, many kids are surprised to learn that their parents have taken out life insurance policies on them. You can take a life insurance policy out on anyone as long as you have an insurable interest, meaning that your finances would be affected if they died. Because parents are responsible for their children’s funerals, they fit into this category.
When an adult takes out life insurance on another adult, they need that person’s permission for the policy to be valid. However, parents can take out life insurance on their children without needing their children’s permission. There are also some life insurance plans designed for children that you can take with you into adulthood. Many parents purchase these plans for their children to ensure they are protected as they transition into adulthood.
There are advantages and disadvantages to taking out life insurance on children. If your parents have taken out life insurance on you, you may be wondering how exactly to handle the situation. Here’s what you need to know about life insurance for children.
How Does Life Insurance for Children Work?
Many major life insurance companies offer policies that are specific to children. Some companies, like Gerber, even specialize in kids’ life insurance plans. These policies are usually whole or universal life insurance policies, which mean they last for your entire life without expiring. They also typically have a cash value component that you can use to grow your wealth. Because children are unlikely to pass away, life insurance companies are able to offer these policies with very low monthly premiums.
What Are the Advantages of Purchasing Life Insurance for Your Child?
There are a number of reasons why people purchase life insurance for their children. Many people want to be prepared for an unlikely worst-case scenario, and having life insurance for their child provides peace of mind. Getting a life insurance plan at a young age also helps keep premiums low for the rest of the child’s life. When you purchase life insurance as an adult, you’ll need to take a medical examination, and your premium cost will be determined by your health and lifestyle. If you purchase a life insurance plan at a young age, the premiums stay the same throughout your life. Finally, many people choose to use the cash value portion of the life insurance plan to save for their child’s future.
What Are the Disadvantages of Purchasing Life Insurance for Your Child?
Although there are many benefits to purchasing life insurance for your child, it isn’t always the most financially sound investment. While these life insurance plans can seem affordable, the costs really add up over time, and they don’t always provide the best benefits for your child.
Many people purchase life insurance for their children as a way to build savings. However, this usually isn’t the most efficient way to invest your money. When you pay your monthly premiums, a portion of this is invested by the insurance company as part of your cash value. While it’s possible for the cash value to grow substantially, that’s not always what happens – the growth is often limited by market performance. Financially, you’ll get more value investing your money somewhere else as a way to save for your child’s education and future.
The other disadvantage to consider in this situation is that it’s very rare for children to die. This means that you’re paying monthly premiums for something you’re unlikely to use for a very long time. While purchasing a child’s policy does lock them in at a low insurance rate, it’s also important to note that most people in their twenties and thirties can easily get an affordable life insurance policy.
What Are the Alternatives to Purchasing Life Insurance for Your Child?
There are a few different alternatives to a child’s life insurance plan that can give you the same savings potential and peace of mind. If your main concern is paying for a funeral in the unlikely event your child passes away, there are a few ways to go about it that are more efficient. The first is to add a rider to your existing insurance policy to cover your child as well. Most insurance companies have this as an option for an additional monthly fee. You can also consider putting money into an emergency fund that you can use for any unforeseen expenses.
If you’re most interested in saving for your child’s future, there are other investment vehicles that can work well for this. Talk to a financial advisor before setting one up to make sure you’re choosing the right option for your needs. 529 accounts are specifically designed for college savings plans, but you can also opt for a custodial investment account, which you can transfer to your child when they reach adulthood.
What Should I Do With the Life Insurance Plan That My Parents Bought Me?
If your parents purchased a life insurance plan for you where you were a child, you might be wondering what to do with it now that you’ve reached adulthood. One option is to take control of the policy. When doing this, you’ll want to change the beneficiary on the policy to make sure it suits your current needs. For example, you may want the beneficiary to be your spouse instead of your parents.
If you have cash value built-up on the policy, you may be able to use it to pay the premiums on your insurance. Depending on the way the cash value has been invested, you may also choose to pull it out of the policy and reinvest it. If you’re interested in doing this, contact a financial advisor for more guidance.
You could also opt to switch to a different type of life insurance policy. You can do this using a 1035 transfer, which allows you to choose a whole or universal life insurance policy that better fits your needs.