If you're a parent, you understand the importance of having the right type of life insurance to protect your family. Whether you have term insurance or a permanent* policy (such as whole life, universal life insurance, or variable universal life), you've taken the time to select the policy that meets your individual needs and financial goals.
But what about life insurance for kids? If you've decided to purchase a life insurance policy for your children, how do you decide which policy type is best - term or permanent insurance? The following are some considerations when deciding on what type of life insurance to purchase for a minor.
Term life insurance
Many life insurers offer term life insurance policy for children. On the pro side, term life insurance allows you to buy a lot of insurance for comparatively little premium. So, if you buy term life insurance for children when they're young and in good health, the premiums are typically very low. It may also provide a fixed premium (your payments won't increase during the term chosen) and coverage that is guaranteed as long as premium payments are made.
When considering a term policy for your child, you need to understand that term life insurance provides coverage for a limited period of time only. For example, when your child turns age 20, that 20-year term policy that you purchased when he was born will expire. This means if he wants to continue to have life insurance coverage, he'll need to buy a new policy based on his current age and health status. Some term policies allow you to convert all or a portion of your child's policy into a permanent policy without proof of insurability. While a guaranteed insurability rider can allow future purchases of insurance coverage without proof of insurability. However, these policy riders have very specific requirements and often must be purchased at the time the policy is written.
Permanent life insurance
An alternative to term is a permanent life insurance policy, such as a whole life, universal, or variable universal life. These policies are intended to last your child's entire life and can lock you into a lower premium rate while they are young and healthy. A permanent policy ensures that your child has coverage now, as well as in the future - even if they become ill and uninsurable. So if you have a family history of a certain medical problems, or other reasons to believe your child will find difficulty in securing a life insurance policy later in life, you might want to purchase while they are young.
Permanent life insurance can also build tax-deferred cash value. This cash value can be accessed for your child in the future for such things as college tuition or the down payment on a home. And paying premiums regularly can also be disciplined, simple way to contribute to your child's savings. Whole life provides a fixed premium with a benefit that won't expire (as long as required premiums are made). Universal and variable universal life policies also accumulate cash value over time, but with the flexibility to adjust premiums and coverage.
It is important to note that variable universal life insurance involves the risk of investing in equity securities, including market risk and loss of principal. If the investment performance of underlying investments is poorer than expected (or if sufficient premiums are not paid), the policy may lapse or not accumulate sufficient value to fund the intended application. Investments in variable universal life insurance policies are subject to fees and charges from both the insurance company and the managers of underlying investments.
*As long as required premium payments are timely made.