It isn’t easy to take out a life insurance policy on a newborn child. It goes against the emotional grain of the first weeks and months of life when parents (and sometimes grandparents and siblings) dedicate their time and energy to protecting and nurturing the precious gift they have been given. Taking out an insurance policy on that cherished, new life seems akin to making a pact with the devil, betting on death. But children’s life insurance is not a wager against life; it is an investment in life. It can make a child’s life richer, fuller, and more secure.
With children’s life insurance, time is on your side. You have years—decades, really—to build a solid financial foundation for your children. Whole life insurance is a good tool to do this because it is simple and affordable.
A whole life insurance policy will insure a child for his or her entire life, and it will build cash value over the years. The cash value is the amount the insurance company will return to the policyholder in a lump sum, should he or she cancel the policy. Traditionally, the cash value of a whole life policy will equal the face value of the policy when the policyholder turns 100 years old. For example, a policy insuring a child for $35,000 would have a cash value of $35,000 on his or her 100th birthday.
The policy’s cash value is like equity in a home: The policyholder can use it for collateral on a loan. Some companies allow the policyholder to withdraw the cash value as a loan and then pay it back later. There is no application process for this withdrawal, so no chance of being turned down based on poor credit. It is a guaranteed asset.
By the time the child turns twenty, the cash value of a whole life policy will be roughly equal to the amount of the paid premiums. A $15,000 policy with a $10-a-month premium would have a cash value of about $2,400 after 20 years. You or your child may have the option of increasing the policy’s face value on certain anniversary dates, such as when the child turns 21, while maintaining the same monthly premium.
Keep in mind that the premium rates available after a child is born are the lowest you will ever see. Insurance rates increase with age, even for children. In addition, whole life premiums are locked in when you take out the policy. They will not go up as the child ages.
If you cannot afford a whole life policy, consider term life insurance. A term life insurance policy covers a set period of time and will not build cash value. On the positive side, however, term life is much less expensive than whole life. Its only purpose is to insure against unexpected death. This is not something anyone likes to think about, but consideration must be given to all the survivors, including siblings. Unpaid medical bills and funeral expenses will affect an entire family’s finances. Life insurance is a way of protecting the financial future of all the children in a family.
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