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Consider getting life insurance policies for your children

4 min read

The inspiration for my column today, as with various other columns, is something that happened that made me think, ‘Did I do the correct thing?’

One of my customers is facing the greatest fear I know: a life-threatening illness to one of his children.

Kids don’t have incomes, but it can make financial sense to insure their lives. Getting a life policy for kids doesn’t suit every family. Yours might be so well off as to not need such protection. For others, though, this coverage can provide peace of mind and protection against the financial costs of losing a child, which would be a burden to cover.

When my first daughter was born, I fortunately had a complete understanding of how life insurance works. I wanted first to protect my own income, to pay funeral costs, and to insulate myself against future debts (unpaid medical bills) for which I would be responsible if my daughter would become ill and die.

I also understood that life insurance costs are age-weighted: the younger you are, the lower the premium and the greater the living benefits (cash values) would be.

Most life insurance companies allow you to buy insurance on your children without their knowledge or consent, starting when they are as young as 14 days old and continuing until they turn 16 years old. The application, typically, has only a few health questions and does not require a medical exam.

Child plans tend to be offered as whole life insurance policies, meaning they offer not only the benefit of coverage, but feature a savings component known as cash value. Premium dollars go into two buckets: one to cover the cost of insurance, the other to provide living benefits children could realize when they no longer want coverage.

Whole life insurance policies also have a borrowing provision that enables you to take money out of the policy while still having the protection of a death benefit.

There are several riders you can add to a whole life insurance policy that you should understand. Waiver of premium pays the premiums for the life of the policy if your child becomes disabled. A guaranteed insurance option enables your child to purchase additional insurance in the future, regardless of his or her current health condition.

Beginning when your child is age 19 and continuing to 49, the insuring company will send a letter to the insured every three years, offering additional coverage without any medical qualifications.

If you want simple insurance on your children without the living benefits (term insurance), you face the problem that insurance companies don’t issue term life insurance plans for people who are younger than 18. If you are purchasing a policy on yourself, you can add a rider called children term rider.

This rider will cover all of your children until they are age 25. At 25, the insurance company usually offers to insure the child with five times the original rider amount without medical qualifications.

When comparing life insurance policies on children, be aware there are two types of insurance companies – participating and non-participating. Participating companies share their profits with policyholders in the form of dividends. Non-participating companies do not. Participating companies’ initial premiums may be higher, but their living benefits also should be higher.

Every life insurance company should provide the purchaser of a policy with an illustration of current and future benefits of the policy. Companies also should provide the purchaser with the ratings of their firms.

Never buy a life insurance policy without getting an illustration and a copy of the company’s ratings. When provided with these tools, comparing policies will be easier.

Life insurance policies also can be great gifts from grandparents to grandchildren.

Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Thursday in the Observer-Reporter.

To submit columns on financial planning, investing or business-related matters, email Rick Shrum at rshrum@observer-reporter.com.

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