Should You Buy Life Insurance on Your Children?

Few things in life are more devastating to a family than the death of a child. Many people find it difficult to even consider the possibility of losing a child but proper foresight can help you cope with such a tragedy and even prepare for a more secure future as your child reaches adulthood.

Future Insurability
Insuring your child while they are in good health is a sound idea. If they develop a serious medical condition in the future, it may affect their ability to purchase life insurance. By purchasing insurance on a child, you guarantee he or she will have life insurance as an adult, regardless of any future health concerns that may develop.

If a policy includes an additional insurance rider, it also guarantees the child may purchase more insurance as an adult. Premiums for the future policy will be based on the child's health classification at the time of the original policy even if the child's health has worsened.

Unexpected Expenses
Funeral and burial expenses are only the beginning of the financial loss that can occur with the unexpected death of a child. Outstanding medical bills and unexpected expenses can be significant. Insurance on children is one way to protect against the risk of financial loss with an unexpected death of a child.

Some families are in a position where young children are likely to have significant wealth in the future. Insuring these children when they are young may provide help for them later in life when they face possible estate tax liabilities.

Coping with Your Loss
Making a substantial gift to a charitable organization may comfort bereaved families by providing a lasting remembrance of a child. Life insurance proceeds can help surviving members establish a scholarship fund or lasting memorial in honor of a child. They can also allow family members time to seek counseling or take additional time away from work to deal with their loss.

"Rainy Day" Fund
College costs, a wedding, a first home purchase—all expenses for which a potential financial resource could come in handy. Assuming a child in perfect health makes it to adulthood, the accumulated cash value of a permanent life insurance policy can be substantial. Take for example, a policy issued on a healthy baby girl 18 years ago with an original face amount of $100,000 with an annual premium of $519. Today, that policy's face amount would have grown to $172,778 with a cash value of $15,274*—a rainy day fund most people wouldn't mind having.

Gift from Grandpa
Grandparents often see the purchase of life insurance on the life of a grandchild as a lasting gift they can provide. It's the start of a secure financial future that may outlive the grandparents and be a gift of love to be used in the future.

Insurance on children is an affordable way to protect against financial loss and purchasing a policy on a young child can save money since premiums are generally lowest at early ages. Life insurance is also a cost efficient way to provide the cash needed to pay estate taxes or other final expenses. As with all permanent insurance, life insurance proceeds are typically income tax free. The cash value in the policy grows tax-deferred and may be used later, possibly qualifying for favorable tax treatment (see your tax professional for details).

*Based on an actual NN 65 Life policy issued by Northwestern Mutual in 1986, female age 0, select, all premiums paid in cash, dividends used to purchase paid up additions, 2004 dividend scale interest rate. Dividends are not guaranteed. By surrendering all or part of a policy's cash value, the death benefit and cash value will be affected.