Pros and Cons of Using Child Life Insurance for Savings

Every parent wants to provide a secure financial future for children. As such, it is a natural part of that journey to explore every available tool. Using Child Life Insurance as a savings vehicle is a strategy that you may have heard about before, but is it something that your family should do?

This idea is a subject for heated debate among financial advisors. Some praise it on its guarantees while others highlight it costs and low returns.

We understand that you need the confidence of clarity not the confusion of confusion. This extensive guide will take the pros and cons of using Child Life Insurance for savings. We will put it in direct orientation with other mainstream practices and leave you confidently make a choice that will benefit your little one. Building strong Family Savings begins by understanding all your options.

What Exactly is Child Life Insurance?

At its simplest Child Life Insurance is a type of permanent life insurance and the most common way Child Life Insurance is provided is in the form of whole life insurance for kids. Unlike term insurance which only covers a person for a certain period of time, a whole life policy is intended to cover a person for life.

The important feature that causes it to be a potential tool for saving is the cash value growth component.

Here’s how it works:

A portion of your monthly premium payment is for the cost of your death benefit. The portion that is left over, after fees have been pulled out, is funneled into a cash value account.

This account or cash value is meant to grow at a slight fixed rate and it’s tax-deferred growth. Over the course of many decades, this value accumulates in cash and can peaked for cash, or used to borrow cash. This is the “savings” component of the equation that is encouraged in many policies. For a more in-depth discussion of financial products definitions, Investopedia is a great resource.

The Mechanics of Cash Value Growth

The concept of growth of cash value is at the heart of this whole discussion. It’s what makes a policy distinguished from a whole life policy. However, its growth is often slow and steady, rather than being rapid.

The insurance company credits your cash value account with a minimum guaranteed interest rate. Some policies may even pay out non-guaranteed dividends, which can add some slight increase to your returns.

Crucially, this growth is not like a high yield savings account. In the early years of the policy, a large part of your premiums is used for the cost of insurance and the administrative costs.

Therefore, the rate of accumulation of the cash may be very slow at first. It frequently takes more than a decade before the cash value is equivalent to the total premiums that you’ve paid-in. This sluggish start is a huge bone of contention for financial critics.

The Compelling Pros of Child Life Insurance

While it is not without its critics, there are certain, tangible benefits of buying Child Life Insurance for a minor. These benefits are commonly revolved around guarantees and long-term security.

For some families though, the pros outweigh the financial drawbacks. Let’s understand the main reasons as to why do parents choose this path.

Pro 1: Locking in Future Insurability

This is perhaps the best argument for Child Life Insurance. When you purchase a policy for a healthy child, you are assuring that he will be able to secure life insurance coverage as an adult.

Life is unpredictable. A child might have a chronic disease, such as diabetes or a heart problem, later in life. Such a diagnosis may make it extremely hard or prohibitively expensive for them to advance to life insurance as an adult.

A Child Life Insurance policy circumvents this risk. The coverage also stays in effect, irrespective of any health problems that they may develop in future. Many policies also include riders which provide the option for the child, as an adult, to cover additional coverage of the policy without the need for a medical exam.

This offers a great form of Financial Defense to future uncertainties.

Pro 2: Building a Modest, Tax-Deferred Savings Vehicle

The cash value component does act as a forced savings plan. For parents that are not necessarily disciplined savers, the monthly premium helps to establish a habit.

In addition, the increasing cash value is tax-deferred. This means that you do not have to pay taxes on the interest earned each year, which would help it to compound better than it would if it was in a taxable account.

When the child reaches adulthood, he or she has access to this cash value. They can take out a loan against it, which is usually tax free, in order to help with a down payment on a home, start a business, or help with an emergency. This can be a good tool that can leveraged for long-term Wealth Growth.

Pro 3: The Benefits of Low Premiums in Child Life Insurance

Because of the extremely low probability of any child dying, the premiums for the Child Life Insurance are incredibly cheap. A meaningful amount of coverage could be available for as little as $15 to $50 per month.

What is more important is that these premium payments are forever locked up. The rate that your child secures at the age of two years will be the same rate that they pay when they are 40 years old, should they wish to continue with the policy.

This can amount to huge savings over their lifetime than purchasing a new whole life policy as a 40-year-old. When it comes to considering any plan, you have to pick from the best Safety Options offered.

The Significant Cons of Child Life Insurance

And now we have to turn the other side of the coin. Financial gurus explain why these policies are often not recommended by saying one thing simply: opportunity cost. The money you spend on premiums could virtually always be working much harder for you elsewhere.

Let’s break down the major disadvantages so that so many are hesitant.

Saying that it is rather a weak hybrid, financial planner Amelia Chen explains that it is poor to use insurance as the savings scheme. It does a mediocre job of insurance, and it does a mediocre job of investment.” You’re better off purchasing a cheap term insurance and investing the difference.”

Con 1: The High Cost of Premiums and Fees

While premiums may sound low on the surface they are expensive for what you get. The actual “cost of insurance” for a child is miniscule – often just pennies a day.

The rest of your premium goes toagent commissions, administrative fees and other charges before it ever gets to your cash value account. This is why the growth of the cash value is so slow in the beginning.

These internal fees are not often transparent. In contrast, modern investment vehicles such as ETFs and mutual funds have very clear expense ratios so that you can see exactly how much you’re paying. As mentioned by many analysts in platforms such as Forbes Advisor, high fees are the fear number one enemy when it comes to creating wealth for the long term.

Con 2: Slow Growth and Lower Investment Returns

The interest rate on the cash value of a whole life insurance for kids policy is almost always very low. It might be in the range of 2% to 4%.

While this can be increased by the sporting of dividends, the dividend is not guaranteed. Historically, the S&P 500 has been averaging approximately 10% annual returns over the long haul.

By investing your money into a low yielding insurance product you potentially risk forfeiting decades of compelling compound growth. The difference between the investment return of 4% or 9% for 18 years is staggering. This lost potential is the “opportunity cost” alleged by critics.

Con 3: Better Alternatives Often Exist

For most families, the greatest long-term financial savings goal for a child is education. There are dedicated investment vehicles designed for this purpose which are much more efficient.

The most popular of these is the 529 college savings plan. These plans have great tax advantages and far greater growth potential.

Even for general savings, opening up a custodial investment account (UGMA/UTMA) and investing in low cost index funds would likely result in a much larger nest egg for your child by the time that he/she gets to adulthood. The reality is that there are superior choices all across the financial landscape. It’s a good idea to know every trick, such as Quick Payout Tactics in case you need money.

A Head-to-Head Battle: Child Life Insurance vs. a 529 College Savings Plan

To get a true sense of the trade-offs, let’s look at Child Life Insurance put head to head with its principal competition for long-term children’s savings: 529 college savings plan vs insurance.

This is the decision many parents are faced with. One is a source of guarantees and a death benefit; the other is explosive growth potential and tax advantages for education.

Round 1: Investment Growth Potential

This is not a fair fight. A 529 plan is a way that you can invest in a collection of stocks and bonds like a 401(k). This gives your money direct exposure to the growth in the market.

• Child Life Insurance: You would get an average of 2-4% return annually on your cash value.
• 529 Plan: Can be realistically used to achieve an average annual return of 6-10% based on performance from the market and your investment choices.

Over 18 years this difference is monumental. A dollar invested in a 529 plan will expand significantly faster and grow to a larger total than a dollar invested in the cash value of an insurance policy.

Round 2: Tax Advantages

Both vehicles have tax advantages, but both are made for different purposes.

• Child Life Insurance: The cash value growth is tax-deferred. Loans against the cash value are usually tax free. However, the premiums are being paid using after-tax dollars.
• 529 Plan: Here is where the 529 absolutely shines to have an Education savings. The contributions that you make may be tax-deductible on your state income tax. The money grows completely tax free. And, most importantly, withdrawals are because of qualified education expenses 100% tax free.

Recent government changes have increased the definition of qualified expenses to make 529 plans even more flexible. You can find out more information about how Government Changes can affect your financial strategy.

Round 3: Flexibility and Use of Funds

At this point, the comparison is subtler.

• 529 Plan: The money is to used for education. This includes (and now extends to) K-12 tuition, apprenticeships and even student loan payments. If the money is withdrawn for a non-qualified expense, the earnings portion will subject to income tax and 10% penalty.
• Child Life Insurance: The cash value is available for their use. The adult child can borrow against it for a wedding, a house, or a car without any questions being asked. This flexibility is the major selling point.

However, the amount of cash available will probably be much lower than what could have been accumulated in a 529 plan. So, you have more freedom with a lower amount of money.

Popular Policies: Understanding the Gerber Life Grow-Up Plan

When parents are talking about Child Life Insurance, there comes a time when one name you are sure to hear – gerber life grow up plan. It is one of the most highly marketed and well-known products in this category.

Companies such as Gerber Life have created a very strong brand around leveraging a simple, accessible financial product that catered to children.

The Grow-Up Plan is a whole life plan for which a range of coverage from $5000 to $50,000 is available. One of its main attractions is that the amount of coverage automatically doubles during the year that the child turns 18, with no increase in the premium.

As an adult, the policy owner has several options to buy extra coverage up to 10 times the original amount of the policy, irrespective of their health or occupation. This is a direct answer to the “guaranteed insurability” pro we talked about above.

While it’s a popular and straight-forward product, it has the same basic evils as other whole life policies-high internal costs and a low rate of return on the cash value compared to pure investment alternatives. It’s very crucial to compare the offers by different Market Leaders. before you make a commitment.

“The marketing for these ‘grow-up’ plans is brilliant because it appeals to a parent’s love and fear,” says parenting finance expert David Ramirez “But, love doesn’t have to cost you buying an inefficient product. The most loving financial thing that you can do is often maximize your child’s future wealth, which often means investing and not insuring.

The Verdict: When Does Child Life Insurance Make Sense?

After taking into consideration the evidence, it’s obvious that for the vast majority of families, saving in Child Life Insurance is not the best financial strategy. The opportunity cost of it is simply too high.

But that’s not to say that it doesn’t have any use. There are certain, niche situations in which it can be a prudent and valuable component of a larger financial plan.

Scenarios Where Child Life Insurance Can Be a Smart Move

• A Family History of Medical Issues: If your family has a significant history of juvenile-onset diseases or conditions that manifest themselves in early adulthood, a policy that covers your child is a good defensive move. It ensures that they will not be denied healthcare later.
• High-Net-Worth Estate Planning: For very wealthy families, a life insurance policy on a child can be a good estate planning tool to pass wealth down through generations in a tax-advantaged manner.
• Special Needs Children: If you have a child with a disability who will likely need care for their entire lives and may not be self-sufficient a life insurance policy can be part of a larger trust to help fund the child’s needs when you are no longer there.
• You’ve Already Maxed Out Other Savings: If you’re already saving the maximum amount into your 401(k), IRAs, and a 529 plan, a Child Life Insurance policy could considered as having a hyper-conservative alternative as a supplemental savings vehicles.

Scenarios Where You Should Probably Look Elsewhere

• Your Primary Goal is College Savings: If your primary goal is to save for your child’s education, a 529 plan is without a doubt the better tool to use. The growth potential and tax advantages have no comparison.
• You Are on a Tight Budget: If you are finding it difficult to save, every dollar does count. Your money will work much harder in a high interest rate savings account for emergencies or low cost index fund for long term growth.
• You Don’t Understand the Fees: You can’t get a straight answer on the internal fees, commissions and surrender charges, walk away. Transparency is key. It’s also important to monitor Emerging Brands that could have more transparent products.

How to Choose the Right Policy and Avoid Pitfalls

If you’ve come around to the notion that a Child Life Insurance policy suits your particular needs, it’s important that you go about the selecting procedure with your eyes wide opened. All policies are not created equally.

First, always work with a reputable independent agent that will be able to show you what options are available from multiple carriers. Don’t just go with the first company that you see advertised.

Second things first – understand the surrender charge period. This is kind of a period and it’s often 10, 15 years and then you will pay a hefty penalty if you cancel the policy and take the cash value. Be sure that you are ready for this long-term commitment. Learning to protect yourself in the claims adjudication process: Always be vigilant and Protect Yourself from Claim Fraud Read all the fine print.

“Ask for an ‘in-force illustration’ which illustrates the guaranteed values compared to the non-guaranteed values,” advises insurance analyst, Sarah Jenkins. “Focus on those sure things that are numbers.” That’s all the company is under contract for. “The projections that are not guaranteed are just marketing.”

Key Questions to Ask an Advisor

Before you sign anything, take yourself out for a course of armament made of these questions so you’ll be making a sound decision:

1. What is the complete annual internal cost, including all the fees and charges?
2. What is the guaranteed minimum interest rate with respect to the cash value?
3. Can you show me the year by year breakdown of the Guaranteed cash value in comparison to the premiums paid?
4. What is the surrender charge schedule?
5. What are the exact terms in the ‘guaranteed purchase option’ for further insurance in the future?

Making the right choice has nothing to do with purchasing a product but about securing the financial well being of your child.

Conclusion: A Tool for a Specific Job

In the enormous world of finance, Child Life Insurance is a special tool to used not a universal solution. While it is promoted as a wonderful children’s savings plan, there is one area where the plan is much stronger-savings; it is guaranteed for insurability at some future time.

For the average parent where saving for college or building a nest egg for their child is the top priority, the answer is obvious: save in tax-advantaged investment accounts such as the 529 plan. The superior growth potential and the dedicated tax benefits will almost always result in a much larger sum of money at your child’s disposal in his future. It’s also a good idea if your family frequently travels to look into other types of financial instruments, such as Travel Safety Contracts, for example.

However, if your family’s situation is unique in some way, and you have other circumstances such as anyone in your family suffering with health issues or complicated estate planning, then this product can act as a valuable safety net for your family. It offers peace of mind hard to put in dollars and cents. The decision, in the end, comes down to your own personal financial situation and what your goals are and how much risk you are willing to take. By having a good understanding of both the compelling pros and the significant cons, you can decide if Child Life Insurance is the right piece for your family’s financial puzzle.

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