When does it make sense to buy life insurance for a child?
Before you seek permanent or term life insurance quotes for a child, make sure you understand the arguments for and against juvenile life insurance.
Those who favor child life polices say they are useful as part of a greater financial plan for building savings and investments over time. Opponents insist that for most consumers, these policies are a waste of money. That's because the principal reason to buy life insurance is to replace income. Since most children are not wage earners, their death does not represent a loss of income that needs to be offset.
Permanent policies typically are more expensive than term policies. Affluent people looking for ways to protect their money may find that permanent, cash-value policies work to their advantage, however. They can be used as shelters against taxes.
In contrast to term life insurance--which protects you for a set period--permanent policies remain in force for the insured's lifetime, as long as you keep up the premiums. And they build up value that can be used while you are still is alive.
Saving for the future
If you are saving money for college, life insurance may not be your best choice. Instead, consider a 529 education plan. There are both prepaid tuition plans and college savings plans.
In the beginning, permanent, cash-value policies accrue money slowly. The offsetting benefit is that they have predictable returns. By contrast, 529 plans rely on the performance of the investments in their funds. You may earn more with a 529 plan, but you won't have the same guarantee.
Remember, permanent, cash-value life insurance, when properly structured, grows tax-deferred. You can withdraw up to your cost basis and take loans up to the value of the policy.
And the life insurance rates you pay do more than provide you with monetary compensation for the death of a loved one. An insured child can maintain his or her permanent policy after reaching adulthood. If the child stays in good health, the policy value can be increased. If your child develops an illness that otherwise would disqualify him or her from buying life insurance, the permanent policy can be maintained.
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