Insurance is an important financial tool that parents are encouraged to invest in. And knowing the different insurance types is very beneficial. It acts as a safety net against unexpected situations, provides financial stability, and helps generate long-term health. All of these can give parents peace of mind, which may indirectly affect their optimal well-being.
In addition to their personal insurance, parents are recommended to insure their children. Which insurance type to purchase typically depends on the kids’ needs and parents’ goals for them.
Let’s focus on the top three insurance types every parent should invest in for their children.
For more on this topic, check out the full Saving Money collection
Health Insurance
Parents now have several health insurance options for their kids. If they’re working, they can easily add their child to their employer-sponsored health plans. This is more inexpensive because most companies cover a portion or all the premiums. It’s also beneficial for parents with kids with pre-existing conditions since most companies cover their employees and family members without underwriting.
If parents already have a family health insurance plan, they can include their children under that plan. This option can also be money-saving because many insurers offer a family discount.
Lastly, if parents can’t add their children to any existing health plan, they can opt for a child health insurance plan (CHIP). It’s a state-run health plan in the United States that provides free or low-cost coverage to children as long as their parents have Medicaid or Medicare.
Private Plans
Alternatively, parents can try child-alone private plans, where they’re often named as policyholders. But only their children will be covered. The advantage of these plans is they can be bought without going through the ACA marketplace.
That means parents don’t have to wait for open enrollment periods to purchase them. However, they’re more expensive and have to be paid in full without subsidies than CHIP, Medicaid, and other ACA marketplace plans.
Whether it’s an employer-sponsored or self-purchased health plan for children, it’s important to consider your children’s health and your financial capabilities. The next step is finding the most suitable plan coverage to satisfy these needs. To do this, always do your due diligence when shopping around and comparing different plan types.
PPO and POS
Take PPO or POS, for example. A preferred provider organization (PPO) plan covers in- and out-of-network providers and doesn’t require a primary care provider (PCP) and referral. This flexibility is beneficial if your family has hereditary diseases. However, it comes with higher plan costs.
A point-of-service (POS) offers fewer choices and requires PCPs and referrals. It’s much cheaper than a PPO plan, but note that this is often fairly rare for employer-sponsored and self-purchased (individual/family) markets.
Life Insurance
At the most basic level, this type of insurance covers funeral expenses if a child passes away. Some child life insurance policies also have “accelerated benefits,” which provide financial benefits should the covered child become terminally or chronically sick.
Additionally, investing in child life insurance is more cost-effective. The rule of thumb is that the younger a person is, the lower the insurance claim risk, which makes their insurance cheaper.
To put it in another way, older people tend to have higher insurance premiums because health deteriorates with time. They’re more susceptible to getting sick or even passing, so insurers may have a higher risk of paying benefits on the policy.
Age Matters
Another reason purchasing life insurance at a younger age is cost-effective is that the policyholder may lock in the lower premium for the duration of the policy. For example, if a parent buys a child whole life insurance, the low premium may stay fixed despite the kid getting older.
Speaking of whole life insurance, a portion of its premiums goes toward building cash value. This makes a good investment for two reasons: (1) lower insurance costs, and (2) longer time for cash accumulation since the kid is still young and growing.
529 Plans
One of the gold standards for saving money for your kids’ future education is investing in a 529 plan. It’s a flexible, tax-advantaged account for paying educational costs from kindergarten through graduate school.
Its tax breaks are its main advantages. The earnings from any mutual funds invested will grow tax-deferred, and the withdrawals are tax-free as long as they’re used for any education-related expenses.
However, there’s no federal credit or deduction for your contributions. The savings will also be considered a parental asset, which is counted in an applicant’s Expected Family Contribution (EFC). This may lower your kids’ chances of being eligible for certain kinds of student aid.
Financial Considerations
If you want to be excluded from financial aid calculations, consider purchasing life insurance for your kids’ future education. In addition to the aforementioned benefits, parents can take out a loan against their life insurance’s cash balance and use it for their children’s school expenses.
The problem with borrowing against your insurance is that it reduces its death benefit until you pay back the loan. There’s also no guarantee that you can borrow immediately since the cash value takes time to exceed what you’ve paid in premiums.
Final Thoughts on Insurance Types
Life insurance, health plans, and savings accounts for education aren’t the only types of insurance parents should get for their children. It’s recommended to continue researching other insurance types to find the ideal financial protection and vehicle for your children’s future. If unsure, don’t hesitate to seek professional help to avoid costly mistakes.
For more on this topic, check out the full Saving Money collection
