Juvenile life insurance is permanent life insurance that you buy for a child. You buy it because the premiums for children are much lower than they are for adults.
How does it work?
Some of your money builds up cash value in the policy. As your child grows up, you can decide when you want them to take control of the policy. The child can either take the cash value out, or borrow against it to pay for their education. There are costs either way.
- If the child takes cash: They will get a lump sum equal to the cash value. They will have to pay tax on all investment income, and they will lose their insurance coverage.
- If the child borrows against the cash value: They can borrow smaller amounts of money, as they need it. For example, they can borrow enough to pay their tuition at college, either from the insurance company, a bank, or other financial institution. They will pay interest on the loan, but they may get a lower rate from banks or other financial institutions.
Advantages:
- The money you make investing is tax-sheltered.
- At the same time, you get the benefit of having insurance for the child.
Disadvantages:
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Some policies limit how much cash you can save.
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Other policies have rules about how you can invest your money.
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You are paying for insurance you may not really need. Some experts believe the only real reason for life insurance is to protect the people who depend on you for financial support. A child may not be in this situation and may not need insurance.
Couldn’t you just save up cash in your own permanent insurance policy instead of buying juvenile life insurance? The answer is "yes." The drawback is that the cost of insurance for you will be much higher because of your age, as compared to your child’s age. On the plus side, you are in control of the money at all times. That can be a good thing if you’re not sure the child will make the wisest use of your savings after you turn over the juvenile policy to them.
See how this option compares to other ways of saving for your child’s education