Whole life insurance for children: pros and cons

Whole life on a child locks in lifelong coverage at a very low age-based price and builds cash value, but it does not replace income, because children do not support a household. Its real benefits are guaranteed future insurability, a small funeral cushion and a long-horizon savings vehicle. Most families whose first goal is protecting a child's parents are better served by adequate coverage on the parents; whole life on a child is a secondary choice once that is done.

What a child policy is

A child, or juvenile, whole life policy insures a minor for life. The parent or grandparent usually owns it and pays the premium; the child is the insured. Premiums are level and low in dollar terms because the child is young and healthy, and the policy builds cash value on the same schedule as an adult whole life contract. The policy owner can usually transfer ownership to the child when they are an adult, and some policies include a built-in increase in coverage at set ages. Details vary by insurer.

Who may buy: the buyer needs an insurable interest in the child, which parents and grandparents have. See insurable interest: who can buy life insurance on whom and life insurance for grandchildren.

The case for

• Locks in insurability. If the child later develops a condition, such as diabetes or a heart condition, the coverage is already in force. Adults who cannot qualify later for individual coverage, or who would pay far higher rates, keep the policy they bought as a child. A related feature is the guaranteed insurability riders: buying more coverage later, which can be added to some policies to buy more coverage later without new medical review.
• Low age-based premium for life. Premiums are level and do not rise with age, though total cost over a lifetime is substantial.
• Cash value that grows over decades. Starting at birth gives the longest possible runway. The cash value can be borrowed against or surrendered. See whole life cash value: how it grows and how to use it.
• A small cushion for final expenses. Most children are healthy, and the death of a child is rare, but if it happens, a modest policy can cover funeral costs. See what a funeral costs and how families pay for it.
• A gift that can transfer. A grandparent can buy a policy and, when the child is grown, hand over ownership.
• Possible tax-deferred growth and, if the owner is careful, access to funds through life insurance policy loans: how they work and what they risk. See how cash value is taxed: withdrawals, loans and surrenders.

The case against

• A child has no income to replace. The main job of life insurance, replacing earnings for dependents, does not apply. The financial risk families usually face is the loss of a parent's income.
• High cost compared with the protection. The dollars paid mostly build a savings vehicle, not coverage. The same dollars invested in other accounts may grow faster, with more risk and less certainty.
• Slow early cash value. As with all whole life, early surrender returns less than premiums paid. If a family's circumstances change and the policy lapses, the money may be largely lost. See surrendering a life insurance policy: what you get and what it costs.
• Future insurability is not a certainty to need. Most people stay insurable, and many can later buy term at modest cost. Paying for 30 or 40 years to protect against a risk that may never occur is expensive. The value of the guarantee is real but uncertain.
• The child may not want the policy. An adult may prefer coverage designed around their own family, in a different amount.
• Opportunity cost. Money earmarked for a child policy may be better used on parental coverage, college saving or a retirement account.

Cheaper alternatives

For a broader discussion, see should you buy life insurance for a child? and life insurance as a college savings tool: the trade-offs.

A hypothetical example

Say a grandparent buys a $50,000 whole life policy on a newborn grandchild and pays a modest premium for life. The premium is invented here for illustration; real quotes vary. By the child's 30th birthday, the policy has paid in decades of premiums and holds a cash value; the child, now an adult, takes over ownership and keeps the lifetime coverage. If the child developed a serious health condition at age 20, the existing policy would still be valid, which is the main value of buying early. If the child stays healthy and later needs more coverage, they may easily buy a term policy on their own and the childhood policy becomes a savings asset with a modest return.

Questions to ask before buying

1. What is the cash value at ages 5, 18 and 30, guaranteed and projected?
2. Can ownership transfer to the child, and at what age?
3. Is there a payor benefit, which waives premiums if the paying parent dies or becomes disabled? See waiver of premium riders: what they cover and when they pay.
4. Does the policy offer a guaranteed insurability option, and for how much?
5. What are the early-surrender values? Do I have the budget to keep it going for decades?
6. Have I first covered the parents' income needs? See How much life insurance do I need?.

Key takeaways

• Whole life on a child offers lifelong insurability, a small final-expense benefit and a long-horizon cash value, but no income replacement.
• The strongest argument for it is locking in coverage before a health condition appears; the strongest argument against is the cost relative to protection.
• Insure the parents first, then consider a child policy, a child rider or saving instead.
• Check cash value by age, ownership transfer rules and any payor or guaranteed-insurability features.
• Plan to keep it for decades; early surrender usually loses money.