Should I buy life insurance for my child?

Some financial planners insist that child life insurance is a waste of premium dollars, arguing that life insurance should cover only family members who generate income. Putting money into other investments, like tax-sheltered educational savings accounts, might seem to be a superior investment for a dependent's future.

However, there are some reasons for buying dependent life insurance beyond educational expenses, just as there are many types of child life coverage that could meet a family's needs.

Group child life insurance

Some group benefit plans include dependent life insurance that covers an employee's spouse and children. Typically, group death benefit amounts range from $5,000 to $25,000 for each insured child. Those relatively small amounts can lessen the financial burden of funeral and burial costs.

Group life is term life insurance that ends when a child reaches a specified age (such as 25 for students) and without any cash value. If the insured child does not die within the term, no claim is paid. Some states do allow employees to convert their dependent life benefits to individual policies.

Single-premium coverage

One type of individual child term insurance requires only one premium payment. For example, Illinois Mutual charges a one-time premium of $300 for ChildGUARD term insurance, which provides the following child death benefits:

• $5,000 from birth to age 13.
• $10,000 from 13 to 18.
• $15,000 from 18 to 23.

For 23 years of coverage, the equivalent cost of the $300 single premium is about $13 a year.

The ChildGUARD single-premium policy also could provide an additional benefit -- a lifetime insurance privilege. At age 23, the paid-up insurance can be replaced with whole life insurance for up to $100,000. Provided premiums are paid, children can be insured throughout their lives under a whole life policy, even if they develop chronic life-threatening diseases like cancer. Insuring the child at birth can create a bridge to future insurability.

Whole life insurance

Buying a whole life insurance policy for dependent children when they are babies can be cost-effective. Whole life premiums are inexpensive for toddlers, compared with those for adults. For example, a Mutual Omaha child whole life policy with a benefit of $30,000 is quoted as $9.10 a month for a child less than 1 year old and $22.60 a month for a 25-year-old.

Unlike term life, whole life offers lifetime coverage and does not end after a fixed period. A whole life policy also accumulates tax-free cash value. As an adult, the insured person can take over paying the premiums instead of beginning a new policy.

Endowment insurance

Child coverage also is sold as endowment life insurance. The face amount of an endowment life insurance policy is paid out as a lump-sum cash value or as a death benefit.

The Gerber Life College Plan is an example of an endowment life product that enables parents to save a guaranteed cash benefit amount from $10,000 to $150,000. That cash benefit becomes available after a premium payment period that the applicant chooses, from 10 to 20 years. Policyholders can take out loans against a policy's cash value.

Here's how it works. Parents buy a $10,000 Gerber Life College Plan for their healthy 7-year-old daughter with an 18-year premium payment period. Since the monthly premium is $33.33, a total of $7,200 in premiums will be paid over 18 years. When the insured person turns 25, the face amount of $10,000 is payable -- a $2,800 gain over 18 years and a 39 percent increase from the total premiums paid.

Unlike 529 education plans and Coverdell education savings accounts, which are restricted to educational expenses, the accrued cash value from endowment child life insurance can be spent on whatever the policyholder wants.