Life Insurance for Small Children: Sensible or Silly?

Insuring a child’s life can be a delicate subject, but can make financial sense, depending on your families financial situation.

Traditionally life insurance is used to protect an individual’s family from an untimely death; for example a couple has two small children. If a primary-income earner dies, where is the money going to come from to replace the lost income? Most young couples will not have accumulated enough capital to sustain the lost of income. Without life-insurance, the consequences can be dire – the house that the family has worked years to obtain, may be lost and the family’s standard of living is therefore drastically altered.

Again, when analyzing your family’s life insurance needs, the first order of business is to insure the primary-income earners. In most instances, excluding young Hollywood stars, children are not income earners and while a child’s death would have a huge emotional impact, it would not have a dramatic financial impact. Having said that, assuming that all of your financial bases are covered, insuring a child can make sense and can also offer many long-term benefits.

Insuring a child at a young age guarantees that he or she has insurance now and has the ability to get insurance in the future. This will protect the child’s ability to obtain insurance against future health problems, such as asthma or cancer; it will also protect the child against risky occupations such as becoming a firefighter or pilot. Most life-insurance policies give you the option of adding a guaranteed insurability rider which allows the child to upgrade his/her insurance in the future, without a medical.

Permanent policies also allow your child to lock in at very favourable rates and can be paid up in a limited number of years. The policy can generate cash value which is available in the case of an emergency or to help supplement the child’s retirement income.

For those cases, where one or both parents have hereditary health issues, insuring a child may have an added importance; for example a couple has a history of diabetes and colitis within their immediate family. Insuring their newest addition at a very young age creates a safety-net against the child developing future health issues. A child who eventually has a family of his/her own may have developed health issues in the interim and as a result, may not be able to obtain new insurance; even if it possible to obtain the insurance, a new policy may have a large sur-premium due to health issues.

Permanent policies can also give the child’s future family added financial flexibility – the cash value can be used towards a down payment on a new home or as collateral for a loan to start up a new business venture.