Buying life insurance for child pays off down road
Buying a life insurance policy for a child can help provide a youngster with financial security well into retirement years.
Rather than thinking of a child's life insurance policy as being valuable only if the unthinkable happens, it can instead be considered a long-term savings strategy that increases in value the longer it's held. Eventually, the policy could be worth hundreds of thousands of dollars.
This strategy is becoming increasingly popular among grandparents, who want to give their grandchildren a financial head start in life.
There are typically three types of life insurance policies available to cover children:
- Whole life (also known as "permanent life")
- Term life
- A rider on a parent's policy
Like the name implies, permanent life insurance last for an indefinite period of time, as long as the premiums are paid. Term life covers a set span of time, such as 20 years. And a rider normally lasts until the child reaches a certain age.
Regardless of the type of policy you buy, purchasing it for a youngster guarantees that the child can be insured. Children who convert a term life policy to a permanent policy won't have to go through medical underwriting, although premiums rise with age.
A life insurance policy for a child is usually for a small sum, like $10,000, but often the amount can be increased as the child grows into adulthood.
By hanging on to the policy, it builds up a cash value, which the child then can borrow against for everything from helping to pay for a college education to buying a first home.
The policy has value even longer term as it grows on a tax-deferred basis, allowing a child to borrow against it or cash it in to supplement income during his retirement years.
Another option is to convert the life insurance policy to an annuity in order to receive a set income amount each month.
And by combining it with other retirement tools, like Social Security benefits and IRAs, a child will be able to determine the best solution to keep taxes to a minimum.
Before choosing a life insurance company for the long haul, it's important to verify the company's financial viability, using a rating agency such as A.M. Best. Otherwise if the company closes up shop, all your savings will be for naught.
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