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Pros and cons of children's life insurance

If you're a parent supporting a young family, adequate life insurance for you and your spouse is a priority. Whether you should buy life insurance for your young children is a question subject to much debate.

Death Benefit

Pros: The primary benefit of life insurance is the death benefit. For most people, life insurance is purchased to cover final expenses and to replace lost income. While most children don't have an income to replace, the death benefit can be used to pay for memorial and funeral expenses, as well as any uninsured medical bills for the prior care and treatment of your child.

Cons: While the emotional impact of a young child dying is incalculable, the financial impact is negligible for most people. Unless your child earns an income that needs to be replaced, the primary reason to have the death benefit is to pay for memorial and funeral expenses. If you want to insure those possible expenses, you may be able to add your child to your own life insurance policy for a small additional premium. If you don't have life insurance for yourself, or the policy doesn't allow you to add your child as an insured, another option is to buy a small ($10,000 death benefit), low-cost term life insurance policy for your child.

Cash Value

Pros: Permanent life insurance, such as whole life or universal life, may build tax-deferred cash value. The policy's cash value can be accessed for your child in the future for such things as college tuition or the down payment on a home.

Using permanent life insurance for its cash value has a couple of other advantages. Paying premiums regularly can be a disciplined, simple way to contribute to your child's savings. And, if your policy qualifies, you may be able to withdraw from cash values up to your cost basis, tax free. Thereafter, you can access cash values through tax-free policy loans.

Cons: While permanent life insurance may have cash value, the primary purpose of life insurance is its death benefit. Underlying policy costs decrease the amount of cash value actually available to earn interest. Policy loans and withdrawals used to access cash value can reduce the death benefit and may cause the policy to lapse. Instead, you might use the money to buy a small term policy and put the remainder in a savings account. You'll likely have greater access to the assets in the savings account and more control over them.

For college savings, there are many options besides life insurance. The cash value of life insurance is decreased by the annual cost of the death benefit (mortality charge). Most other college funding alternatives are not subject to this expense.

Future Insurability

Pros: You don't know if your child will develop a disability or chronic illness later in life, making it hard if not impossible to get life insurance when it's needed the most—when your child's a parent. Buying permanent life insurance for your child can help ensure the availability of coverage later in life.

Also, the premium cost likely will be lower for a child compared to similar insurance purchased as an adult. This is particularly true for children who are at high risk for developing a potentially debilitating illness or disease. Often, a family history of health problems may affect your child's future insurability. Even if your child shows no apparent evidence of the illness during adulthood, the fact that some types of diseases run in the family (such as heart disease or diabetes) may increase the cost of life insurance later in life. Buying the insurance when the child is younger can cut the cost significantly.

Cons: While you don't know what your child's health will be later in life, the chance of a child becoming uninsurable as an adult is extremely small. With insurance company underwriting taking medical advances into account, most people can get insurance even if they have a chronic illness or disease. If you have a family history of poor health, that issue probably will increase the cost of insurance, even for your child. And, if you can insure your child, it's hard to project how much coverage your child may need as an adult.

Bottom Line

There may not be a "right" answer to this debate. Your financial professional can help you determine whether life insurance for your child should be part of your overall financial plan.