Why do people take out life insurance on their children? Should I take out a policy on my child?
Adam Davis's answer is pretty good. However, I think he misses something with regard to the costs of a funeral. According to funeralplanning101.com, a traditional funeral can cost upwards of $15,000. Having just planned and paid for a funeral for an adult, I can assure you that this figure is low. I've heard "$10,000 - $30,000", and that seems a reasonable ball-park given my experience. Additionally, grief affects people differently. If your child died, would you be able to continue work afterwards? Most people can, but some people have to take extended leave (generally with no income) because of the emotional impact. Combined, these expenses can easily outstrip the savings for an average family. Almost by definition, insurance is not cost-effective; insurance companies profit by selling it to you, after all. But you may decide that it is appropriate to mitigate your risk by buying insurance. I do not have children and would likely not choose to insure them if I did. Nevertheless, other people may reasonably choose differently.