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The thought that your children could pre-decease you is something no parent wants to consider. Unfortunately, it is a reality that many parents had to confront in their lives. To prepare for this unexpected tragedy, many parents purchase life insurance on their children. Others look to purchase policies on their children as a valuable asset by getting them insured at a young age and locking in low rates. Before doing so, there are many factors to consider to ensure you are making a wise decision.  

If you feel that your child predeceasing you would create a financial hardship to cover his or her funeral and burial expenses, adding a child term rider to a policy you have on yourself is an easy and affordable option. That rider can have a face value between $5,000 and $25,000. The average funeral costs $10,000, so that is a good amount to start with. To give yourself time to grieve the loss, you can include enough funds in the rider to allow yourself time away from work to heal without concern that your living expenses can be paid. 


These child term riders cover your children up until age 18 with most insurance companies, and up until 25 with others. Once they reach the age of maturity for the policy, they can convert that term rider to an individual term or permanent life policy for themselves at five times the face value of their original policy.


Going the child-term rider route will save you money in the long run and allow you to purchase more coverage for yourself to secure your family's future. This will give you the flexibility to put those savings into some other type of investment vehicle to save money for your child's college education.


However, getting your child his or her own individual permanent policy comes with many benefits. You will be able to lock in a low rate for the rest of his or her life when he or she is still young and healthy. As your child ages, he or she could develop unforeseen health complications, and get into a risky hobby or career that would make it difficult and expensive to obtain life insurance coverage as an adult. Getting your little one a policy at an early age would eliminate this risk. 


Now, besides the death benefit, permanent life insurance comes with many benefits that your child can take advantage of when he or she becomes an adult and acquires ownership and payment of the premiums. The accumulated cash value can be accessed in the event of financial emergencies or opportunities when they arise. Events and opportunities such as a home purchase, wedding, and starting a business can be financed with the cash value. 


The money in the policy is also protected from bankruptcy, lawsuits, and creditor collections, depending on what state you live in. So, a permanent policy can be a very powerful financial tool and gift to your child if put in place at an early age. The policy can also be further customized with a guaranteed insurability rider that will allow him or her to increase their death benefit if they need more coverage. This would be possible at specific life events such as marriage, a newborn child, or certain birthday and policy anniversaries. 


However, you should be advised that not all permanent policies from different life insurance companies are equal. The company and insurance product you choose will determine how well your cash value will accumulate in the policy. Be wise to choose a company that has a history of strong cash value growth in its policies. 


If you are interested in a whole life product, make sure you choose one that pays dividends that can be used to increase your death benefit and cash value growth. If you want a policy with more flexibility and higher potential for cash value growth, then choose an indexed universal life (IUL) policy, specifically made for wealth accumulation.


The policy should be customized to accelerate the growth of the cash value from the early years. This can be done by a skilled life insurance agent or financial advisor who knows how to customize the policy to minimize the cost of the insurance for maximum cash value growth. 


For example, a $50,000 IUL policy on a 2-year-old girl could be optimized to accelerate the cash value. Using it as a savings vehicle to jumpstart her wealth building from an early age, bi-weekly premiums of $28.41 would be paid into the policy. This would amount to $738.66 annually. The policy would be customized to pay premiums up until she reaches her full retirement age of 67 when they would then stop. 


At that time, her IUL policy would have a projected cash value of $262,747.59 and a death benefit of $312,747.59. This would be after only paying $48,012.90 into the policy over the course of 65 years. If she wanted to, she could access the cash value to create supplementary tax-free income in retirement. This is a strategy used by many wealthy individuals to minimize their tax exposure in retirement, and people of modest means can do the same thing. See the graph below for the full projections of cash value and death benefit growth for this sample policy.

Besides all the wealth-building and protection benefits of a permanent life insurance policy, they also come with accelerated death benefit options that can also serve your child well during life. At no extra cost, these policies come with a terminal illness rider that will advance all or a portion of the death benefit if the insured person is diagnosed with a terminal illness and given less than 12 months to live. 


The other rider is a chronic illness rider. This rider provides for the payment of an accelerated benefit if the insured person is unable to perform two out of six activities of daily living (bathing, continence, dressing, eating, toileting, or transferring) or is severely cognitively impaired. These two riders come automatically added on some life insurance products and only cost a nominal activation fee if they are exercised. These riders can be a great benefit to your child if he or she develops a serious health condition later on in life. 


Getting your child a stand-alone life insurance policy can be one of the best financial decisions you could ever make. With all of its many features, it can serve your child in multiple ways when he or she is alive. Because contrary to what many people believe, life insurance is not only for paying a death benefit, paying funeral expenses, and replacing your income for a dependent family. Life insurance is just as much for the living and can be used to create prosperity while still alive. 


There is no better time to re-evaluate your current situation than the present. Connect with a licensed financial professional at Alfa Pride Financial, to assess where you are on your financial journey, and get the financial keys to a worry-free life.