Do Your Children Need Life Insurance Policies?

Odds are, your children do not provide income or services to your household.

Life insurance provides valuable financial coverage to your loved ones in the event of your death, and if you have people who rely on you, either financially or because of services you provide, it's a good idea to have a policy. This is especially the case if you have children, as they will be impacted particularly hard if you pass away. But if you do have children, should they also have life insurance? Probably not, and here's why.

Your kids likely don't earn income

Since the primary purpose of life insurance is to replace income (or pay for services) that would be lost if the insured person died, it's worth considering whether your kids contribute money to your household. If you have a child star under your roof, perhaps -- but odds are, you do not have a child who is helping to pay the bills.

It usually isn't hard for young adults to get life insurance

Life insurance policies for children are generally whole life insurance, which is permanent coverage that gains cash value. These policies are sold with the reassurance that if you insure your child, they won't have the chance to be turned down for a policy in the future. However, whole life insurance policies are more costly than term life insurance, and many people don't need permanent coverage anyway.

Term life insurance policies are generally affordable for young adults, especially if purchased before any serious health issues arise. And true to their name, these policies offer coverage for a certain period of time, perhaps 20 or 30 years, which is often as much as many people need.

There are better ways to save for education expenses

Another way children's life insurance policies are marketed is with the caveat that these policies can be cashed out to pay for college. However, as finance guru Dave Ramsey points out, the return on investing in a life insurance policy is only about as much as what you'd get from a certificate of deposit (CD). Plus, these plans come with plenty of fees.

A better bet is to start a 529 plan for your child's future educational costs. You might also consider saving for college in a Roth IRA, which gives your saved funds more flexibility for whatever life throws your way.

Alternatives to children's life insurance policies

One instance in which you may want a life insurance policy for your child is in the sad instance you have to pay for a funeral and burial expenses. However, you don't have to buy insurance coverage for this. Instead, consider putting aside money you would have spent on insurance premiums in a high-yield savings account. This way, you'll earn interest and have the ability to use that money in any way your child needs.

If you truly want to insure your children, consider adding a child life insurance rider on your own term life policy. This way, your children will have some coverage at a low cost to you, and the rider could be converted to a policy of their own when they become adults.

It is unlikely that you need life insurance for your children, as you don't need it to replace income, pay for college, or guarantee they can be insured over the course of their lives. A good savings account, a 529 plan (or Roth IRA), and perhaps a child rider on your own policy can all meet the needs of you and your child in most circumstances.