Life Insurance for Children: How Does it Work? (2022)

Life insurance for children functions the same it does for adults. But is it really the best way to build financial security for your child? Probably not.

Read on to learn more about how life insurance for children works and why your new family member doesn't likely need their own coverage. You'll also learn more beneficial alternative uses for what would be a monthly premium.

Life insurance for children: how does it work?

Life insurance for children works the same way as it does for adults. You put a life insurance policy in place and, in the event of that person passing away, beneficiaries receive a death benefit in the form of a monetary payout.

There are a few commonly available options for life insurance for children: a term life insurance policy, whole life insurance, and a child term rider.

* Every PolicyMe policy comes with $10,000 of free life insurance for each of your children.

A term and whole life insurance policy for children function nearly the same way as they do for adults. With term life insurance, your child is covered for a set term. With whole life or permanent policy, your child has coverage for their entire life, from birth to death.

Should you buy life insurance for your child?

Unlike getting life insurance as an adult, insurers don't require children to undergo medical exams to determine insurability. It's important to note that if your family has a history of medical conditions, this may be grounds for a provider to deny your child coverage.

Another option is the child term rider. A rider is an add-on to your current life insurance policy for a small monthly fee. This provides guaranteed coverage for all your children until they're adults. Once they reach adulthood, they can convert their coverage into an individual plan if they choose to. 

It is cheaper to tack on a rider to your current life insurance policy than to purchase life insurance for children outright. And while both types of life insurance come with a cash value, life insurance doesn't yield as high a return as other types of investments. 

Nonetheless, this doesn't stop parents from purchasing life insurance for children. “If a parent had some money, and they wanted to do the best they possibly could for the children, they're generally thinking long-term, [and thinking] of getting the kids off to university,” says Lorna Eastman, CFP and president of Lorna Eastman Financial in Victoria, B.C.

Why get life insurance for your child?

If you want to get life insurance for children, there are times when it's appropriate. First, ensure you've cared for all the other financial priorities for your family, such as setting up an emergency fund, saving for retirement, and paying off your high-interest debt.

It's also a wise decision to set up life insurance for your child if your family has a history of a medical condition that could affect their future insurability. Getting them coverage now could guarantee coverage when they reach adulthood.

When can I buy life insurance for my child?

Many life insurance policies allow you to begin a policy as young as 15 months old. While this may seem excessively young for a life insurance policy, with a 0.044 per cent infant mortality rate in Canada, it may make sense.

Plus, the younger you insure them, the greater cash value the policy can build. Plus, buying a whole life policy at a younger age reduces their premiums and prevents your child from paying higher premiums for the same coverage later in life.

Pros and cons of life insurance for children

Understanding the pros and cons of life insurance for children is important when determining if it's right for your family. Here are some reasons people consider life insurance for children and why they may not be good reasons at all.

1) Life insurance is recommended for those with financial dependents

Life insurance is primarily for those with dependents, and this reason is enough of a con to encourage parents to look at different savings methods. Life insurance is meant to be a security blanket for financial dependents. What happens to those who rely on you financially if something happens to you? Realistically, children contribute lots to a home, but money isn't one of those contributions.

You wouldn't be put in a financially difficult situation if the unthinkable happens and your child passes away. Why pay for protection on a non-existent financial risk?

Recommended reading: Life insurance for couples, Life insurance for Single Parents

2) It doubles as a savings plan – but not by much

Permanent life insurance policies not only offer lifelong coverage but also come with a savings component. When you put your money in permanent coverage for your child, that money grows with interest over time. You're not taxed on the interest until you withdraw cash or surrender the policy.

The money you receive from a permanent coverage plan can later be used for anything, including tuition fees. Many parents consider life insurance as a savings fund for education. This makes your children's life insurance plan an investment vehicle of sorts.

However, it takes a long time for these returns to grow into a significant amount before they become useful and you have no investment options. Plus, administrative fees are high and ultimately affect your policy's cash value. Withdrawing cash for tuition incurs fees and reduces the death benefit.

While having child life insurance and a savings plan in a single pot might sound like a good idea, the reality is much less impressive. You guaranteed higher returns by putting that money in a traditional investment account or an educational savings plan.

3) Life insurance for children is cheap – but the benefits are limited

When you get a life insurance policy for your child, you lock in a low rate that stays the same throughout their term. And because life insurance policies for children are relatively cheap, you pay for lower premiums overall.

However, the scope of coverage you get with a child's life insurance policy is limited. By the time they're an adult, your child will likely need to buy more coverage to adequately protect themselves and their future family.

It's also worth noting that life insurance is extremely affordable if you purchase it as a healthy young adult. There's a level of comfort in locking in a low rate for your children, but they will be able to do that in the future.

Think of it the same way you would if you buy something just because it's on sale. If the purchase wasn't a need, you didn't truly save anything.

4) It can guarantee future coverage – but if your children are healthy, they can easily get coverage later

One thing parents consider when looking at life insurance for their children is that some plans allow for instant approval in the future.

If you know your family has a history of health conditions your child will likely inherit, getting a life insurance policy for them early on is a good idea. If not, the chances of them being denied coverage due to future insurability issues are low.

It's also not difficult for young adults to get affordable life insurance in their 20s or 30s. You don't want to pay decades for a premium now, that will likely only benefit them with additional coverage later.

5) It serves as an emergency fund for One type of emergency

With a life insurance policy on your child, you become the beneficiary of a death benefit that pays out if your child passes away. You can use this death benefit to cover medical and funeral expenses, counseling, and replacement income should you need to take time off from work.

However, life insurance only kicks in after death. Thankfully, the chances of your child passing away are low, so you wouldn't ever see this money. Plus, a whole host of other events come up in the course of a child's life that have surprise expenses attached to them. With an emergency fund, you can pay these bills more easily without paying withdrawal fees on a child's life insurance.

If you value the financial security of life insurance policies in an emergency, you shouldn't pay for a completely separate policy. Adding a child term rider to your policy can get the same benefits for a lower cost.

Photo of a father holding his child for PolicyMe's article on life insurance for children

The best ways to prepare for your children's financial future

What's the best way to prepare for your children's financial future? It may not be getting taking out a children's life insurance plan. Not that it's a bad idea, but you can make better financial moves that protect your children the same. Here are some of them.

1) Set up a traditional savings (and investment) account

Eastman says she'd rather establish a long-term, easy savings plan that's accessible and does not cost her too much money as a parent of grown children.

Opening a high-interest savings account on behalf of your child is one way to do that. Not only will it yield greater returns over time, but it's also easy to set up and access. Over time, you can contribute as much you want, as often as you want to this account.

You can also deposit monetary gifts from family and friends. When you gift the account to your child when they're older, they can use the cash to buy their own life insurance policy – with some extra to spare.

Similarly, your child will benefit more from a traditional investment account that grows significantly over time.

2) Take advantage of government grants to save for your child's education

For parents in Canada, the Registered Education Savings Plan (RESP) lets you save and invest money for your child's post-secondary education.

In an RESP, investments grow tax-free. Your child will only be taxed for the income they receive from the RESP once they're in university, and since the income bracket of students is low, so is the tax on RESP payments.

The federal government also adds 20% of your contribution to your child's RESP with the Canadian Education Savings Grant (CESG). You can get up to $7,200 in total CESG.

Additionally, there's the Canada Learning Bond (CLB), which the government contributes to the RESP of children from low-income families.

The best part about an RESP is that even small contributions make a big difference over time. “Once you have that awareness and ability [to make contributions], it's not hard,” says Eastman. “It can really help a lot, more than you expect.”

Benefits are available at the provincial level depending on where you're located within Canada.

In British Columbia, there's the B.C. Training and Education Savings Grant (BCTESG), which the provincial government deposits into the B.C. child's RESP account.

In Ontario, there's the Ontario Student Assistance Program (OSAP), which provides financial aid for college or university.

3) Secure your life insurance first

Securing your life insurance policy is one of the best ways to protect your children's financial future.

As a parent, you want to know your children are taken care of in case something happens to you. This is why it's more important for you and your partner to have life insurance policies. Having coverage for yourself is one of the best ways to protect your children's financial future.

Not only will this cover medical bills and funeral expenses in case of your death, but it also ensures your children's daycare services, education, and other expenses are paid after you're gone.

With your own life insurance policy, you can add on term riders that cover all of your children until they're adults. This is easier to get and much cheaper than a life insurance policy for a child.

Not sure how much life insurance you need? Try PolicyMe's life insurance needs calculator.

4) Create emergency and rainy day funds

Consider building emergency and rainy day funds for unexpected expenses, like last-minute replacements for school-related technology. These funds give you greater control and yield greater returns when stored in a high-interest savings account. Should money get tight in the future, you don't want to surrender your policy in exchange for cash or get charged for cash withdrawals that reduce your benefits.

In summary: Life insurance for children is generally not necessary

Should you buy life insurance for children? Here are some key takeaways on this topic:

  • Life insurance for children can be purchased in a few different ways. You can get term life insurance (a plan that ends after a set term), whole life insurance (a lifelong plan), or a child rider
  • While there are some pros to this kind of coverage, it's mostly unnecessary. You only need life insurance if you have financial dependents, and you aren't relying on your children for their income
  • There are better uses of a monthly premium as a way to save for your children. You can put aside a monthly deposit into a traditional savings account or start an emergency fund for your child, to name a few

FAQs: life insurance for children

You likely have many questions about buying life insurance for children. Here are answers to a few of the most common questions about life insurance for children.

Can I buy life insurance for my adult children?

Yes, you can purchase a life insurance policy for your adult child. However, you will need to take a few steps to enroll in a life insurance policy for your adult child, this includes:

  • Getting your child's consent
  • Having your child sign the life insurance policy application
  • Having your child answer health-related questions

As a parent, your responsibility to your children doesn't always stop when they reach adulthood. It can continue well into adulthood as they learn to navigate the world of being a grown-up. This can include ensuring they have a life insurance policy.

Do children require medical exams for life insurance?

No, a life insurance company will not require a child will not have to endure a medical exam when you apply for a policy. You simply complete the application and fully reveal all their existing and family medical history.

This can be helpful in the future too, as when they become adults and choose to transfer a children's life insurance policy to an adult policy, they will be guaranteed approval without a medical exam.

Is life insurance for kids worth the cost?

In general, no, a children's life insurance policy is not worth the cost. You can do many other more important things for your family with the planned monthly premium payments, such as start an emergency fund, save for retirement, save for college, and more.

There are exceptions, though. For example, a children's life insurance plan may be worthwhile if your family has health issues that are likely to pass to your child. Not only do you have coverage if your child passes away due to this condition, but it also guarantees their coverage as an adult by converting the policy.

Laura McKay

COO & Co-Founder

About the Author

What to read next