When Is Term Insurance Better For My Child?

In our previous article "How much should I be spending on insurance for my child?", we mentioned that a child does not require life insurance as he/she has no liabilities. However, parents may still choose to buy insurance for their child so as to lock in the insurability of their child. This ensures that their child would have coverage even if he/she were subsequently diagnosed with a health condition.

While whole life insurance is often recommended as the life insurance to get for a child, this may not necessarily be the better option. In this article, we highlight three instances when you should consider a term instead of a whole life plan for your child.

Term insurance

Commonly used to address a temporary protection gap, term plans require lower upfront premiums and are seen as the affordable option for life insurance. A non-participating plan, term plans do not accumulate cash values.

However, one downside about term plans is that premiums are required to be paid for as long as the policy is in-force. This means that you would still have to pay for premiums at age 70 should you wish to continue receiving coverage then. Additionally, as term insurance offers coverage for a specified number of years, coverage will end after that period is over and your child will have to buy a new plan then. If he/she has health issues then, the new plan will not cover these health issues as they would be consider pre-existing conditions.

(See "Is Your Term Insurance A Costly Mistake?")

Whole life insurance

Whole life insurance offers coverage for life and is commonly used for protection and/or legacy purposes. A participating plan, whole life insurance accumulates cash values. This offers flexibility with the option to surrender your policy and cash out in future should the need arise. Alternatively, the policy owner may also surrender the policy at age 65 (or at retirement) and use the surrender value to pay for the premiums of their hospital plans in future.

With the limited pay option for whole life plans, this allows you to only pay premiums for a specified period. This means that you can purchase a whole life for your child at the age of 1 with a limited pay period of 20 years. At age 21, the whole life policy will be fully paid for and your child will not have to pay any future premiums. Alternatively, parents can also choose to retain control over the plan by keeping the policy ownership. This allows parents to retain control until the child is mature enough to handle his/her own insurance policies.

However, a factor to consider is that whole life plans will require higher upfront premiums. Therefore if you are uncomfortable with having to pay higher upfront premiums, then a whole life plan may not be suitable for you.

(See "When Is Whole Life Insurance The Better Option?")

The three instances when a term insurance may be the better option for your child.

#1 Lower upfront premiums

Term insurance are often seen as the affordable option for life insurance with term plans requiring a lower upfront premium as compared to their whole life counterparts.

^{Premiums shown are accurate as of 4 January 2021.}

There are two types of term plans available: a regular term plan and a 5 year renewable and convertible term plan. Both plans offer the same coverage with the difference being the policy term and annual premiums. With a shorter coverage period, premiums for 5 year renewable term plans tend to be even lower than those of regular term plans.

(See "Transfer Your Wealth To Future Generations With A 3G Plan")

#2 To lock in the insurability of your child

A child with no dependents does not need protection coverage. Therefore, an important question to ask is what your intentions are for getting life insurance for your child?

If you are simply looking to lock in the insurability of your child, then a term plan may be suitable as a temporary solution. This ensures that your child is covered even if he/she subsequently develops any health issues.

With term plans keeping the cost of coverage low, your child may also feel less obliged to keep this plan should he/she wish to upgrade or switch to other coverage options in future. Do remember to get a term plan that is convertible so as to give your child the flexibility to upgrade to a whole life plan at a later age should he/she wish to do so.

(See "The True Cost Of Raising A Child In Singapore")

#3 For early critical illness (ECI) coverage

Lastly, consider term plans if you wish to get early critical illness coverage for your child.

As a child does not have any dependents who are financially reliant on them, purchasing ECI coverage would instead be to help replace the parent’s income. This is because parents may choose to stop working to take care of their child if he/she were to unfortunately be diagnosed with an ECI. This lump sum pay-out from ECI coverage could then help parents to cover their living expenses as well as the expenses required for the child’s treatment.

Some examples of critical illness include: cancer, kidney failure, ischaemic heart diseases (including heart attack) and stroke.

(See "Cheap Critical Illness Cover For Those In Their 30s")

In summary, term vs whole life insurance

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