Life insurance for children – a branch of life insurance that is not as well-known but could definitely be a hidden gem, a gift that keeps giving.
What is a Child Life Insurance Policy?
A child life insurance policy is unlike a regular life insurance policy. In a child life insurance policy, the payer of the policy is usually the parent or the grandparent. The person who is insured is the child. And the beneficiary of the policy could be a trust, foundation, or even a parent. Usually, the reasons that people purchase life insurance policies for children are not the same as the reasons why life insurance is purchased for adults.
Where Can It be Applied?
The reason a life insurance policy is purchased on a child is not because the child has an income-earning capacity, or that there would be a loss of income in the event they passed away. It has more to do with the sense of gifting. A parent may decide to purchase a life insurance policy for their child, with or without a critical illness benefit, so that their child could enjoy life insurance cover in their older years through a policy that has been paid for or gifted to them by their parent.
Imagine yourself purchasing your first life insurance policy. This may have happened in your late 20s or maybe even your early 30s. You would pay the premiums beginning from your 30s onto, however long, depending on the structure of the policy. In comparison, if you had to purchase a policy for your child today, when they’re between the ages of 5-18, essentially, by the time they are 25 or 30 years old, you could have finished paying into this policy. The child would have a fully paid life insurance policy with critical cover by the time they’re 30.
Is There Cap on Life Cover That Can be Assigned to a Minor?
The other interesting thing to see with life insurance policies purchased for children is usually insurance companies put caps on what is the maximum level of cover for life and critical illness that can be purchased for a minor. However, insurance companies also do have an indexation mechanism that allows for life insurance policies to consistently grow in cover at a certain growth rate. This could be an increment of 10% – 15% per annum.
For example, let’s assume the cap on the life insurance policy today is $150,000 of life cover available to a child. The following year, it could be $165,000 because it increased in value by 10%. By the time the child is 30, that policy could have increased in value to $600,000 of life and critical illness cover.
Again, I’ll take you back to the situation when you were 30 years old and you were purchasing your first life insurance policy, purchasing about $600,000 of life insurance cover and critical illness cover. While it may have been a need, you may not have had the means for it.
In contrast, for a child who has had a life insurance policy paid for by their parent completely, at age 30 it wouldn’t matter what the premiums are. At the age of 30, while they may have also still have a need for that life insurance policy, they’re not entering into those conversations with their mind about whether this is affordable or not. Because this it has already been completely paid for by the parent.
A Case Study
Many years ago, I was introduced to an individual whose daughter lived in Downtown Dubai. She was earning a good salary and had the affordability to purchase a property of her own by paying a down payment and getting collateral in the form of a life insurance policy assigned to the bank. While the child was able to secure the down payment requirement, thanks to a financial gift from the father, she faced a hiccup when it came time to finance the property through the bank. Securing a life insurance policy was the only thing holding her back.
It was only then when she went to get her medicals done for the life insurance policy, that they found out that she was uninsurable because of a certain heart murmur, and some complexities around genetics which only came to light for the first time.
Now, realizing that she’s uninsurable, the bank was unable to offer her financing and withdrew the offer to finance her property. The only way for her to purchase that property would be to pay up all the money that was required for that property upfront.
If I can flip this around, a life insurance policy put in place for her at age 4 or 5, may have been easier to secure given the lack of rigorous medical checkups required. Here’s how things would look different- she would have been looking to purchase the property at age 30 and a life insurance policy would have already been in place. In theory, she could get bank financing done just on the basis of the fact that she already had a life insurance policy running which could be assigned to the bank.
Who Are These Policies For?
We recommend this as a luxury product, it is definitely not a necessity. It is meant for people who have sorted out the other basic financials. For example, they’ve got their life insurance policy for themself already, they’ve got an education plan running for their children, a retirement fund set up, investments, or a couple of businesses running. They’ve got the liquidity and they have this mindset of gifting.
Parents from the Indian subcontinent and the Arab world especially, tend to look at these products as a gift to be purchased for their child. The value of this gift increases every year just because of the payment of a premium. The understanding from these parents usually is that their child will require life insurance at some point in their life. And as parents, they’re just making that decision for their children today by purchasing their life insurance policy and taking away that decision-making ability of the child about this contract.
Essentially when the child becomes an adult, the parent could change the ownership of this policy from themselves to the name of the child. Or they can do that whenever they think that the child is mentally able to make these decisions on money. The beneficiaries of that policy for the child could then be altered to reflect any benefits to the child, now an adult.
If the means allowed for it, then certainly, it is a very thoughtful gift that could grow in value every single year just by using the feature of indexation on that life cover and critical illness.