At first glance, taking out a life insurance policy on a newborn may seem to make little sense. The primary function of life insurance is to provide funds to dependents when a head of household dies, and no one depends on a baby financially. However, buying a minor policy for a baby may offer advantages in certain situations, such as providing for burial expenses in a worst-case scenario.
Key Takeaways
- A policy on a newborn might seem unnecessary, but there are still reasons to buy one.
- Life insurance covers expensive funeral costs or unreimbursed medical expenses if a child passes away.
- Some families choose to purchase whole life insurance for their children as a way to help them save for college or future life events.
- Some companies specifically market children's whole life insurance plans.
- Many adult life insurance policies offer child riders you can add for only a few dollars a month.
How Life Insurance Works
A life insurance policy pays a sum of money to a named beneficiary if the insured dies while the policy is in force. The policy owner pays a premium (usually monthly) to keep the coverage active. Life insurance is most frequently sold to adults to provide financial security for their families or businesses in case the insured passes away.
The two main types of life insurance for children are term life insurance and whole life insurance. Term life insurance pays only if the insured dies within the defined term, such as 10 or 20 years. If the insured outlives the term, the policy expires without paying anything out. In some cases, the owner may be able to renew it at a higher premium or convert it to whole life coverage. A whole life policy stays in force as long as the premiums are paid and accumulates cash value that can be accessed for such purposes as paying college costs.
Term vs. Whole Life
As most term life policies never pay a death benefit, the premiums are much cheaper than whole life policies, which always pay out eventually (unless the policy owner lets them lapse). For example, a 30-year-old male nonsmoker in Florida can obtain a $100,000 term life policy covering 20 years for about $9 per month. A whole life policy with the same death benefit would cost him $50 per month or more.
While term life insurance offers the most protection for the lowest cost, some people gravitate to whole life insurance because it doubles as a tax-advantaged savings vehicle. A portion of each premium payment goes into an account that grows with interest over time. The amount of money in this account is the policy's cash value. The policy owner can borrow against this money or even redeem their policy for cash, effectively forgoing the death benefit. A whole life policy also provides guaranteed coverage that lasts into adulthood without any premium increases.
Historically, return rates on whole life insurance have been low, which is why many investors prefer to pay the cheaper premiums of term life and invest the difference in mutual funds.
Babies and Life Insurance
At first glance, insurance for infants seems counterintuitive. While losing a child istragic for parents, it has few financial repercussions beyond medical and funeral expenses. A family does not face a loss of income when a baby dies.
For this reason, one could argue that buying a life insurance policy—even a relatively cheap term policy—on an infant's life is unnecessary. You could put those funds toward more useful or necessary expenses, such as saving for college. Also, since infants have low rates of mortality, it is very unlikely to receive a death benefit payout from a child's life insurance policy.
Still, there are some benefits to getting life insurance for a baby. Should the worst-case scenario happen and your child passes away, the payout can help defray the costs of counseling, time off from work, and other expenses related to a loved one's untimely death, allowing more room for the grieving process and emotional recovery.
Adding a child rider to your own life insurance policy may be less expensive than investing in a child's own policy.
Benefits of Life Insurance for Babies
There are some arguments for buying at least a small life insurance policy for a newborn. The first is having money available if the absolute worst happens and the child dies young. The minimum age for a child to be insured varies by company but typically ranges from 0 to 14 days. Here are some reasons to consider life insurance for babies.
Pays for Final Expenses
As of 2023, burial procedures and expenses range between $7,000 and $12,000. The average funeral with burial costs up to $9,000 or more today, having climbed faster than the Consumer Price Index over the past 30 years.
The death benefit from a child's life insurance policy could cover those sad costs. In case of a long-term illness, it could also compensate parents for medical expenses disallowed by health insurance, helping them avoid burdensome debt.
Locks in Low-Cost Coverage
In addition, the younger the insured is, the less expensive life insurance is. Some parents prefer to lock in a low premium so that the baby will have inexpensive coverage for themselves when they become an adult. Adjusting an existing policy is often more economical than buying a brand-new one. In addition, many adult life insurance policies offer child riders for only a few dollars a month, providing a little peace of mind.
You may also want to insure your child if you anticipate long-term medical issues. Research the available options if your child already has a long-term medical condition, or if your family's medical history might put them at risk in the future. Buying a policy now helps ensure they will continue to be insurable in the future.
Saves for the Future
Another route with life insurance is purchasing a whole life policy (such as the Gerber Grow-Up plan). It can be used as a financial savings vehicle because a whole life policy builds cash value over time. Ownership of the policy can be transferred to the child when they reach a specific age, such as 18 or 21, depending on the insurer. When the policy is transferred, a child can opt to keep it and continue building on the cash value. They can also cash it out and cancel the policy, which gives them all the money but eliminates the death benefit.
Can You Get Life Insurance for a Baby?
Yes. You can pay for life insurance on a baby or child. Most life insurance for children is whole life insurance policies with a cash value component. When a child turns 18 or 21, depending on the insurer, the child can take ownership of their policy, continue coverage, or cash in the value of the policy and cancel it.
How Much Life Insurance Should I Have for a Newborn?
Most newborns do not need life insurance, but some parents may decide to purchase a whole life insurance policy with a cash value component to build up funds for their child. In addition, life insurance for children can safeguard you from funeral expenses, grief counseling, or other death-related expenses in case of the terrible and tragic premature death of your child.
Does Life Insurance Cover Death in Childbirth?
If a mother dies in childbirth and has a life insurance policy, it will cover the death of the mother, but not the child. Life insurance companies can require a minimum age limit up to 14 days before covering a newborn.
Should You Get Life Insurance Before You Have a Baby?
Yes. You should ideally get life insurance on yourself before you even get pregnant as it may be harder, depending on various health factors, to be insured at a reasonable cost once you are pregnant.
Bottom Line
Parents with a newborn baby should prioritize buying life insurance on their own lives first. If you still have money in your budget, only then could it make sense to buy life insurance on your child. These policies are inexpensive and offer a reasonable combination of benefits, like locking in a low premium for your newborn and helping them build savings.
