In most cases, life insurance for babies is an unnecessary purchase, though it could make sense in some situations.
The birth of a child is a major milestone that triggers a lot of people to start thinking about life insurance, and who in their family needs it.
Whether or not to buy life insurance for babies is a topic of debate in the life insurance industry.
Since life insurance is primarily designed to provide financial protection for one’s dependents, it doesn’t usually make sense to purchase a policy for a baby.
However, many companies promote it as a rewarding investment.
We’ll delve into both sides below, and provide some alternatives that may be better suited to your growing family’s needs.
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How Does Life Insurance for Babies Work?
Term life insurance pays out a death benefit to one’s beneficiaries upon his or her death, in exchange for monthly payments.
In addition to the death benefit, some permanent policies come with cash value, an accessible account that accrues interest over time.
Many of the best life insurance companies offer some form of life insurance for children, with carriers like Gerber specializing in it.
There are two ways to insure your baby:
- Stand-alone policy: You can purchase a children’s whole life insurance policy which comes with a cash value account and lifelong coverage.
- Rider: You can add a child rider to your term policy, which provides a small death benefit if your child passes away before the policy ends or they reach adulthood.
While you can add supplemental coverage to your own policy, you cannot purchase a term life policy for a baby.
Reasons to Buy Life Insurance for Babies
There are a handful of perceived benefits of life insurance for babies.
Here are the main reasons parents and grandparents purchase these policies.
- Insurability: A permanent children’s policy locks in lifelong coverage, guaranteeing they stay insurable, even if they develop medical conditions later.
- Premiums: In addition to guaranteeing insurability, a children’s policy can lock in low premiums for life.
- Savings: The cash value of a child’s policy can be used as a savings account for their college tuition or other goals.
- Final expenses: A children’s whole life policy could pay for funeral costs if a child were to pass away unexpectedly.
Reasons to Avoid Life Insurance for Babies
Despite the potential advantages above, life insurance for babies isn’t always worth it.
The fundamental reason to skip out on life insurance for your baby is the lack of need.
Your newborn doesn’t have an income, dependents, or transferable debts, the main reasons for purchasing a policy.
While a policy could pay for final expenses, the odds of your baby dying in childhood are slim, and you may be better off putting your money towards an emergency savings account.
Likewise, the odds that your baby will suffer from an uninsurable health condition aren’t usually high enough to justify the cost of a children’s policy.
The amount of guaranteed insurability that comes with a policy is often limited anyway, so it might not provide adequate support in adulthood.
Last, some parents purchase these policies to build up a savings account they can gift their child with later in life for college and other milestones.
As you’ll see below, there are multiple alternatives for savings that come with fewer fees and higher rewards.
Is Life Insurance for Babies Ever a Good Investment?
Whether or not your baby needs life insurance is ultimately up to you.
If you have a family health history that significantly increases your baby’s odds of developing a high-risk medical condition later in life, locking in permanent coverage for them might make sense.
And if you have the option to add a child’s rider to your term policy, the peace of mind might be worth a few extra dollars a month.
It all depends on you and your family’s unique needs.
If you have the means to purchase a small policy and want the added security of knowing your baby is protected no matter what, several companies offer child riders and whole life policies to meet your need.
Alternatives to Life Insurance for Babies
If your main reason for considering a policy for your baby is the savings component, take a look at the alternatives below.
- College savings plan: With an education savings account like the 529 Plan or ESA, you get tax-free growth and penalty-free access to funds to pay for your child’s education.
- Custodial account: A UTMA account lets you invest in savings for your child and gift the account to them when they reach adulthood.
When you consider the cost and effectiveness of different life insurance policies, you may realize that you are the one who needs life insurance.
Regardless of whether or not you take out a policy on your baby, you need to consider taking one out for them by insuring yourself and your spouse.
Doing so will allow your baby to grow up comfortably if you pass away. It’s a sound investment that you won’t regret.