Parents often wonder about the best ways to save towards their child’s future. There are several options: savings accounts, mutual funds, bonds, and life insurance. While life insurance can be used in the event of a child’s death, it can also be used as a building block towards college tuition and other expenses once a child reaches adulthood.
Different Types of Life Insurance
Life insurance is grouped into two categories- term and whole. Term life insurance offers coverage for a certain amount of years. Upon the policy holder’s death, that benefit is paid out to the designated beneficiaries. For children, term life insurance is only available through a rider on their parent’s existing policy. A rider is an additional cost that covers another person for a small amount.
Term life insurance is only paid out if someone dies. In terms of savings, whole life insurance is a better option for children. Whole life insurance is a permanent policy that accrues value over time. Once a child reaches a certain age, they can cash out the policy or use it to get a larger life insurance policy.
The Benefits of Whole Life Insurance
Whole life insurance is advantageous if a child suffers from an illness or disease that may prevent them from acquiring life insurance later on. While most young adults have no problem obtaining life insurance, this is something to consider if a child has medical issues.
Both term and whole life insurance will help cover expenses in the event of a child’s death, such as funeral costs, medical bills, and financial assistance for family members that need to take time off from work to grieve.
While whole life insurance is more costly than term life insurance, it does accrue cash value, which can be used for expenses later on in adulthood. The policy can be surrendered completely for the cash value, or the policy owner can borrow money from it which will be paid back over time.
Things to Consider
While term and whole life insurance both have their benefits, there are many other savings options that cost less and are equally valuable. Parents should think about their overall financial picture and weigh all savings options before purchasing life insurance for their child.