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As the rising cost of living places financial pressure on families, many are looking for ways to relieve some of that burden, including by purchasing life insurance. Experts generally agree that buying life insurance is a solid financial move for adults, but there’s a more contentious debate about whether it’s worth buying it for your children.
On the one hand, the idea of locking in a low rate early on is appealing, especially if it can create a more comfortable future for your kids. However, experts disagree on whether life insurance is the right financial instrument to set your children up for success.
To help you decide whether you should buy whole life insurance for your children, we spoke with three financial experts to learn the pros and cons, as well as some alternatives to consider.
Learn more about your top life insurance options here.
Should you buy whole life insurance for your children?
The answer to this question isn’t exactly straightforward. Here’s when it is (and when it isn’t) a good idea:
When whole life insurance for your children is a good idea
Like other life insurance policies, whole life insurance includes a death benefit in the event of death while the policy is in effect.
“Having whole life insurance in that unlikely event can make dealing with the loss less financially stressful,” says Lamar Brabham, a Wealth Management Specialist and President of Noel Taylor Agency Financial Services. “Paying the premium for a child’s life policy will be less of a burden than trying to come up with final expense money in the event of an untimely death.”
There are also certain benefits to locking in coverage while your child is young rather than waiting until they’re an adult, when most people would buy a policy.
“Basically, everything in a whole life policy is guaranteed,” says Brabham. “The death benefit can’t go down, the cash value is guaranteed, the interest rate is guaranteed, and the premium can’t be raised. Another very appealing benefit is that when the child becomes an adult, the policy can be turned over to them and they can enjoy the benefits at a very low premium.”
Because of the lifelong guarantee, whole life insurance may be worth considering if there’s a family medical history that could make it difficult for your child to purchase coverage later. Even if they develop a medical condition that makes them uninsurable, you’ve already locked in their coverage and their low rate.
Compare the whole life insurance options available to you now.
When whole life insurance for your children isn’t worth it
Whole life insurance certainly has its benefits, but some financial professionals recommend against it, especially for children.
“There are a few pros — it locks in insurability for life and can serve as a savings vehicle if structured right,” says Michael Foguth, founder of Foguth Financial Group. “But the downsides? They’re considerable. You’re paying for coverage that’s statistically unnecessary. The odds of a healthy child passing away are incredibly low.”
There are also downsides to the cash value portion of a whole life insurance policy. Generally speaking, these policies have a significantly lower return than you could earn in other savings vehicles. It might take years for your cash value sum to break even with the premiums you’ve paid in, and the long-term return could be half (or less) what you could earn in the stock market.
There are plenty of other financial tools on the market that may be better suited to helping your child reach certain savings goals, whether it’s saving for anything from their college education to their retirement.
Whole life insurance alternatives to consider
The best whole life insurance alternative depends on your goals in purchasing the coverage, according to Matt Hylland, a financial planner and investment advisor with Arnold and Mote Wealth Management.
“If you are concerned about having a death benefit, one alternative would be to look if your company offers life insurance options for your children,” says Hylland.
For example, some life insurance companies allow you to add a rider to your policy to insure your children.
Another option is to purchase a small term life insurance policy for your child. And depending on your family’s financial situation, even beefing up your emergency fund may be sufficient.
If you’re considering whole life insurance because of the cash value component, Hylland recommends considering other savings tools instead. “If you are looking at a whole life policy as a way to help jump-start your child financially, look instead at contributing to 529s, UTMA accounts, or even just a brokerage account,” says Hylland. “These accounts will have lower fees, more flexibility in accessing your savings, and likely a much better return.”
The bottom line
There’s no one-size-fits-all answer as to whether whole life insurance is worth it for children. It has some advantages, including locking in coverage at a low rate and relieving financial stress from families.
On the other hand, since the returns on whole life policies can be lackluster compared to other investments, it’s important to consider all the downsides.
If you think whole life insurance fits your family’s financial situation and goals, make sure to speak with a reputable financial planner who can present you with your options and help you choose the one that’s best for your family.
