If you're thinking about buying life insurance for your child, my first suggestion is to make sure you're covering the right person. The main purpose of life insurance is to replace income lost after someone dies. While there's little doubt that your income could decrease if your child passed away, due to lost time at work or lost productivity, your child probably isn't contributing much income to your household. Instead, I'd advise you to think about protecting your child's future by purchasing more life insurance for you and your spouse.
Should I Insure My Child Now, While the Rates Are Low?
While it's true that life insurance policies for kids are inexpensive, the cost alone shouldn't be your only consideration. Still, there is one consideration that might make now a good time to buy. You might want to buy life insurance for your child if he or she is at risk for developing a specific medical condition that runs in your family, or already has a condition that is likely to worsen over time. Because health plays a big role in getting affordable rates, insuring a child may be the right thing to do if that insurance would be prohibitively expensive later in life.
Should I Buy Cash Value Insurance to Help Save for College?
Some parents do use the tax-deferred cash value of a permanent life insurance policy to accumulate funds to pay for college. In general, you're allowed to withdraw paid-in premiums with no tax consequences, and borrow against the earnings at low or no interest. Keep in mind, though, that policy loans and withdrawals may affect the death benefit.
Remember the bottom line: your decision to purchase life insurance should center first on the death benefit. Buy life insurance because you need the financial protection it offers, not only as an investment alternative. Buying a cash value policy to insure yourself often makes more sense than buying it to insure your child.
What You Can Do Instead
When deciding which family members to insure, and which policies are appropriate, think about how your family's income might be affected. To specifically protect your child, you may want to purchase additional coverage on your own life and on your spouse's life. It's your paychecks that support your child, so those are the people you want to insure. Make sure that the coverage on both parents' lives ensures there will be enough money for day-to-day living as well as for college expenses if something happens to one of you.