Type

• Life insurance sold to children is normally a cash value policy. Whole life insurance provides a guaranteed death benefit and guaranteed cash value account. Some policies that parents buy on their child allow a "step-up" in coverage at a certain age. For example, the policy may provide $25,000 of coverage that doubles when the child turns 18.
  
  

Significance

• Whole life insurance represents a policy with a dual function. First, it provides a death benefit to the parents in the event of the child's death. Second, it provides a cash reserve that functions as a savings account for the parents until the child reaches the age of majority (normally 18) in the state where the family lives.
  
  

Benefit

• The cash value account provides money that may be used for any purpose. If the child needs money for a major expense, this money may come out of the cash value of the policy. These expenses could include a school trip, the child's first car, or even a down payment on a first home when the child has grown.
  
  

Disadvantage

• Whole life insurance is the most expensive form of insurance. Young families might find it difficult to manage the cost of a newborn and a life insurance policy at the same time. Additionally, the whole life policy may build cash value rather slowly unless the policy contains some type of feature that allows more rapid cash value growth, such as an interest-crediting function tied to current market interest rates, or a policy that earns dividends. Additionally, a death benefit for a child may be of very little use. Actuarially, life insurance companies place a low risk of death on children, so you may be wasting money on the payment of premiums for the child unless she decides to keep the policy for her entire life and not surrender the policy for its cash value.