The primary function of life insurance is to protect and provide for dependents in the event of a head-of-household's death. Consequently, it makes little sense to take out a large life insurance policy on a newborn, as no one depends on babies financially. However, buying a smaller policy for a baby can offer advantages in certain situations, such as providing for burial expenses in the event of a worst-case scenario.

key takeaways

  • Since life insurance compensates families for the loss of a breadwinner, a policy on a non-earning infant doesn't make sense in most cases.
  • A small policy on a child's life can, however, be a way to cover expensive funeral costs or unreimbursed medical expenses.
  • Many adult life insurance policies offer child riders for only a few dollars a month.

How Life Insurance Works

First, a quick insurance primer. A life insurance policy pays a sum of money to a named beneficiary if the insured dies while the policy is in force. The owner of the policy pays a premium for it, usually monthly, to keep it active.

The two main types of life insurance are term life insurance and whole life insurance. Term life insurance pays only if the insured dies within the defined term, such as 10, 20, or 30 years. If the insured outlives the term, the policy expires without paying or, in some cases, the owner can convert it to a whole life policy. A whole life policy stays in force as long as the premiums are paid.

Because most term life policies never pay a death benefit, the premiums are much cheaper than for whole life policies, which always pay out eventually (unless the policy owner lets them lapse). For example, a 30-year-old male nonsmoker in Florida can obtain a $100,000 term life policy covering 20 years for about $9 per month. A whole life policy with the same death benefit would cost him $50 per month or more.

While term life insurance offers the most protection for the lowest cost, some people gravitate to whole life insurance because it doubles as a tax-advantaged savings vehicle. A portion of each premium payment goes into an account that grows with interest over time. The amount of money in this account is known as the policy's cash value. The policy owner can borrow against this money or even redeem their policy for it, effectively forgoing the death benefit.

Historically, return rates on whole life insurance have been low, which is why many investors prefer to pay the cheaper premiums of term life and invest the difference in mutual funds.

Babies and Life Insurance

At first glance, insurance on infants seems counterintuitive. Life insurance is to compensate for the loss of a breadwinner, not a baby. Household finance experts recommend buying enough life insurance to see dependent children through to adulthood. For example, a person making $100,000 per year whose youngest child is 10 needs $800,000 in life insurance to provide until the child is 18.

Because babies do not earn incomes, no one depends on them for a living. While parents losing a child is tragic, it has few financial repercussions: A family does not face a loss of income from the baby. For this reason, one could argue that buying a life insurance policy—even a relatively cheap term policy—on an infant's life is unnecessary and a waste of money that could be put toward more useful expenses, such as saving for college.

In addition to the direct financial benefits, a life insurance policy for a child can also help defray the costs of counseling, time off from work, and other expenses related to a loved one's untimely death, allowing more room for the grieving process and emotional recovery.

When Life Insurance for Babies Makes Sense

However, a couple of strong arguments do exist for buying at least a small life insurance policy for a newborn. The first is having money available in case the absolute worst happens and the child dies young. Death is expensive, to quote playwright Tennessee Williams, and keeps getting more so each year.

As of 2021, burial procedures and expenses typically range between $7,000 and $12,000; the average funeral costs around $9,000 today, up significantly from about $6,000 at the turn of the 21st century. The death benefit from a child's life insurance policy could cover those sad costs. In case of a long-term illness, it could also compensate parents for medical expenses disallowed by health insurance, helping them avoid burdensome debt.

In addition, life insurance is less expensive the younger the insured is. Some parents prefer to lock in a low premium so that the baby has inexpensive coverage for himself or herself when they become an adult. To augment an existing policy is often more economical than buying a whole new one.

In addition, many adult life insurance policies offer child riders for only a few dollars a month. If buying the protection will bring a little peace of mind, why not? Even if it's the sort of claim no parent ever wants to cash in on.