You have several options when your life insurance child rider expires. Yet it boils down to one initial decision. Convert the child’s life insurance policy to permanent life insurance or not.
We will explain both the pros and cons of converting to a permanent life insurance policy. Additionally, we will cover when a child rider might expire and conversion options.
When Does a Life Insurance Child Rider Expire?
You will have to check your specific policy. Typically child riders end when your child turns 18, 21, or 25. Or when the primary person whom the insurance covers (usually the parent) turns 65. The majority of policies end the rider at the child attaining age 25 or the insured attaining age 65, whichever comes first.
Child Rider Conversion Options
First things first. One of the most common questions we get is, “Can I convert to a different company?” Sorry, no. When the term child life insurance rider expires, the conversion must be with the same company. For example, if you have a Principal term life child rider, you cannot convert that to a permanent Transamerica policy.
The next choice is what type of policy do you and your child want. You can convert the rider to either form of permanent coverage, whole life or universal. You may also be able to choose from several permanent life insurance products offered through that company.
A permanent life insurance policy is different from term policies. The differences include:
• Permanent policies are for the person’s lifetime
• Includes death benefits
• Has a cash value accumulation feature which builds through the life of the policy
• Allows the policyholder to borrow against the cash value accumulation portion
• Includes additional fees such as management costs
Permanent life insurance policies are also much more expensive than term policies. This is for 2 reasons:
- A permanent policy lasts much longer than a term, ie. to age 120
- A permanent policy may be designed to build cash value that can be accessed tax-free in the future
The cost of converting when a term life insurance child rider expires to permanent insurance will result in more expensive premiums.
Converting to Permanent Life Insurance – Whole Life versus Universal
The permanent policies will be either a Whole Life or a form of Universal Life policy. These two types of products are very similar to each other. However, there are some vital differences to keep in mind.
Whole life is generally a more rigid form of permanent life insurance. The premiums and death benefits normally remain fixed for the life of the policy. You don’t get many options to customize your policy to your situation, if any.
Universal Life is a more flexible form of permanent life insurance. Usually you have some flexibility in how you pay the premiums. Most policies also allow you flexibility in increasing or decreasing death benefits. Some universal policy may also some flexibility when it comes to investment choices for the cash value accumulation portion.
It’s important to understand what type of permanent policy choices are available before you convert. Knowing when the term life insurance child rider expires gives you ample time to prepare.
Time saving tip. If you work with an independent agent (someone who can offer policies from many companies), just ask them to do the research for you. They probably already have your policy on file if you originally bought it through him or her. Then (with minimal effort on your part) you can get a comparison between all your options.
When to Convert – Timing is Important
The other important point to consider is when to convert. Timing can be crucial or you might miss out on your opportunity to convert. Some insurance companies require the conversion to occur within 31 days of expiration. Other companies allow you nearly a year to make a decision.
As every life insurer is different, you need to be fully aware when the policy can be converted or has to be converted. The following variables can affect when your life insurance child rider expires.
Age of the Child
Most riders must be converted when the child attains a particular age. Which is age 25 for most term riders. Some require that this must be done within a particular time frame. This could be within 31 days of either nearest the child’s 25 birthday or the 65th birthday of the insured.
Age of the Insured
Many child term riders require that the term child rider must occur when the owner of the policy reaches a specific milestone birthday. Most term riders usually say the rider must be converted when the policy owner reaches age 65 or some other age.
A number of term child riders require that the policy must be converted within a certain time frame of the policy owner’s demise.
Amount of Permanent Policy Conversion
Most permanent policies allow you to convert the child term rider while increasing the amount of coverage. Children riders may allow an increase from 3X – 5X the amount of the face coverage of the term rider. If the rider face amount was for $10,000, you could buy a permanent policy up to $30,000 (if 3X was the max) or $50,000 (if 5X the max).
Most life insurers will inform you when the time is approaching to let you know that you have to convert. Although it is mostly on you to keep track of the requisite conversion requirements when the term life insurance child rider expires.
Pros of Converting a Term Child Rider
Converting a term child rider can be beneficial for some people but not for others. Here’s our take on some of the pros in converting a term child rider to a permanent policy.
The first advantage if you feel a permanent policy will be advantageous for your child is the cost. Although permanent policies are more expensive than term policies, this is the best time to buy a permanent policy.
Life insurance becomes exceedingly more expensive as a person ages. As people get older their health begins to decline. Your child can reap the benefits of the cost savings and have lifetime insurance coverage in place regardless of what happens.
The lower premiums will be a big cost savings later on when your child starts their own family because a similar policy can be much more expensive if purchased later in life.
Because all permanent policies have a cash value accumulation portion, your child may be able to reap the benefits of starting to build for their retirement. The cash value accumulation is tax exempt as it builds and is also tax exempt for the person’s beneficiaries.
Another aspect to consider is that your child will be able to borrow against the cash value accumulation portion (death benefits will correspondingly be reduced if the loan is unpaid). Should the child need to access funds to buy a home or start a business later on, they will have some spare cash available.
Special Needs Children
Many families have special needs children who suffer from chronic conditions such as Down’s syndrome, autism, or another pre-existing health condition. Some (but by no means all) of these special needs children may be declined later on in life when they apply for life insurance to protect their own families.
Even those children who can qualify for a policy might have to decide against buying the policy because the premium is simply too expensive to maintain.
The conversion feature of a child term rider can be a good option in this case because it allows you to maintain lifetime life insurance protection for your child. Most term child riders allow you to convert a policy without having to undergo a medical exam.
Although many companies will ask you some health questions about your child before they approve a term child rider, not all of them do so.
Here at Abrams Insurance, we know of only one company which does not underwrite the child at all. It’s Principal Life. For many parents with special needs children, this means their current health situation is of no relevance to the insurance company. The child will be automatically approved. Call us at 858-703-6178 to learn more about this how this works.
Cons of Converting When a Term Life Insurance Child Rider Expires
The other side of the coin can suggest that converting a child rider might not be your best option. These reasons include:
Permanent Life Insurance Policies are More Expensive
If your child is healthy, you might be better off passing up on the option to convert a child rider to permanent life insurance. Most permanent policies can cost up to 10x or more than what you would pay for a term life insurance policy. A term policy might make more sense and is much more affordable.
Lower Amounts of Coverage
Even though the conversion options allow you to increase the face amount of the rider by 3x to 5x the amount, your child may not have enough life insurance coverage. Most term child riders offer coverage to a maximum of $25,000.
The most you could get for life insurance coverage would be $75,000 or $125,000. This amount may be insufficient for the child to fully protect their own family. You often hear that most Americans need at least between $500,000 – $1,000,000 in coverage to provide adequate life insurance protection. This is a generality which can be grossly inaccurate for many scenarios. Like how an average American family has a $56,516 annual household income according to the Federal Reserve. That probably isn’t your number.
An insurance needs calculator can help get a more accurate amount, specific to your child’s life situation. This takes into account things like monthly income replace, final expense costs, and mortgage amount. We have found this better allows people to figure out a precise amount rather an an arbitrary 3x to 7x annual income. Thus avoiding potentially overpaying or being under-insured.
How Abrams Insurance Solutions Can Help
It doesn’t matter where you are in life. The independent agents here at Abrams Insurance promise to guide you when finding the right insurance policy for your family.
We work for you and not the life insurance company. Which means we can almost always find affordable coverage. Whether you are healthy or have pre-existing medical history, there is something out there for everyone. Sometimes it’s just harder to find.
We have access to over 70 of the top-rated life insurance companies in the country. So we do all the comparison shopping for you. Whether you are thinking of buying a term child rider or want to protect a special needs child, we can help.
Call Abrams Insurance Solutions right now at 858-703-6178 with any questions. There is never any pressure or obligation to buy.