Life insurance for children is a topic that often brings a mix of emotions, ethical considerations, and financial debate. For many, the thought of purchasing life insurance for a child is morbid or even unthinkable, while for others, it’s a strategic financial move. Understanding the reasons behind purchasing life insurance for a child, the types of policies available, and the potential benefits and drawbacks is crucial for making an informed decision.
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The Premise of Life Insurance for Children
Life insurance is traditionally designed to provide financial protection to those who depend on the insured’s income. Since children typically do not have dependents or significant income, the argument against child life insurance is that there’s no immediate financial loss to cover if the unthinkable happens.
However, proponents argue that there are several reasons to consider such a policy:
- Guaranteed Insurability: A policy purchased for a child generally guarantees that they can have life insurance as an adult, regardless of future health changes.
- Financial Support for the Family: While children do not contribute to household income, their loss can bring significant financial strain due to funeral costs and the possible need for counseling or time off work for grieving parents.
- Building Cash Value: Some life insurance policies for children have an investment component that can build cash value over time.
Types of Life Insurance Policies for Children
There are two primary types of life insurance policies available for children: term life insurance and whole life insurance.
- Term Life Insurance: This is temporary coverage that lasts for a specific period (the term). It’s less common for children because it doesn’t offer lifelong coverage or cash value accumulation.
- Whole Life Insurance: This is permanent coverage that lasts for the life of the insured, as long as premiums are paid. It often includes a cash value component that grows over time and can be borrowed against or cashed out.
Reasons to Consider Life Insurance for Your Child
1. Locking in Low Premiums: The cost of life insurance is generally lower the younger and healthier the person is. By locking in a low rate when your child is young, you ensure that they have coverage at a predictable cost.
2. Protecting Future Insurability: If your child develops a medical condition later in life that would make them uninsurable, having a policy in place ensures that they have some coverage.
3. Financial Planning Tool: Some whole life insurance policies can serve as a tax-advantaged savings vehicle. The cash value accumulates on a tax-deferred basis and can be used for future expenses like college tuition or a down payment on a house.
4. Covering Final Expenses: In the event of a child’s untimely death, the policy can cover funeral expenses, and medical bills, and provide financial support to the family during a time of grief.
Arguments Against Buying Life Insurance for Your Child
1. Unnecessary Expense: Critics argue that life insurance for a child is often an unnecessary expense since the risk of a child dying is low and no dependents are relying on the child’s income.
2. Better Investment Alternatives: The cash value in whole life insurance policies typically grows at a slower rate compared to other investment vehicles. Financial advisors often suggest that a 529 plan or a high-yield savings account could be a better option for saving for a child’s future.
3. Emotional Consideration: The idea of profiting from a child’s death is a distressing prospect for many parents, and some are uncomfortable with the very notion of it.
Financial Considerations
Purchasing life insurance for a child can also be seen as a long-term financial commitment. The premiums, while lower than those for adults, do add up over time. Before investing in a policy, it’s essential to evaluate whether the money could be better used in other savings or investment options that offer higher returns or more flexibility.
It’s also important to ensure that parents have adequately insured their own lives first. The financial impact of losing a parent is far greater than that of losing a child, primarily due to the loss of income and the need to possibly pay for additional child care and household management.
Emotional and Ethical Aspects
The decision to buy life insurance for a child isn’t solely a financial one; it’s deeply personal and often emotional. Parents must weigh their comfort with the idea against the practical benefits that such a policy could provide. Moreover, they should consider whether they’re purchasing the policy as a means to address their fears and anxieties about their child’s well-being, rather than as a sound financial decision.
How to Choose if You Decide to Buy
If you determine that buying life insurance for your child is the right decision, consider the following:
Type of Policy: Whole life insurance policies are more common for children due to their lifetime coverage and cash value benefits.
Premiums: Shop around for policies with affordable premiums that won’t become a financial burden over time.
Policy Features: Look for policies with features such as guaranteed future insurability and the ability to increase coverage as the child grows older.
Riders: Some policies come with riders, such as critical illness riders, which could be beneficial depending on your family’s health history.
Conclusion
Ultimately, whether you should buy life insurance for your child is a decision that requires careful consideration of your family’s unique circumstances and needs. It’s vital to weigh the emotional aspects and ethical implications as much as the financial rationale.
Consulting with a financial advisor or insurance specialist can provide clarity and guidance tailored to your situation. The key is to ensure that any decision is made with the long-term interests of your child and family in mind, and not out of fear or market persuasion.
I searched, “Why insure your children” and could find no unbiased sites. So I tried this out and was fairly disappointed. Life insurance is situational. My wife was diagnosed with a brain tumor a few months before we were married. She is now unable to purchase life insurance. Early on in our marriage she was working and we had a mortgage and some other debts. It would have been nice to have some life insurance, not knowing how long she would be here given her condition. We shopped around and received a no from everyone we looked in to. Guaranteed insurability, even a small amount, is nothing to take for granted. Also, I can think of nothing worse than having to bury my 6 month old daughter. I am also not a rich man, so I guess it could get worse because the tragedy would be compounded by a financial burden. I understand there are several insurance agents who sell products based on overzealous projections that have virtually no shot of performing as advertised. That’s a shame. But I can also think of many financial advisors, wall street bankers, and mortgage brokers who assisted in nearly collapsing our entire economy. Should I swear off all products offered by those professionals because of the mistakes of those in the past?
Couldn’t agree more. For my situation, it doesn’t make sense. Instead of investing into life insurance for my children, my wife and I have focused on building our savings to 18 months of our household expenses (not including our investments). If I had to bury one of my sons, I would pay everything out of pocket.
For the life insurance, I have purchased a $2.5 million dollar on myself. I currently do not have any life insurance on her (she recently quit her job) but have considered getting a $250-$500k policy to help out.
The purpose of any investment is to give some benefit or reassurance. If purchasing life insurance for your child gives you that, then so be it. Just make sure you’re not planning on it being a huge amount that many often do.
My only comment would be, I like guaranteed insurability. Also, I have life insurance now. If my parents had taken out a permanent policy for me in my youth, it would have made my financial situation at this point in my life better. I would have needed to purchase less coverage and some of my coverage would have been at a fraction of the cost. My view of life insurance on kids is that it is not an investment vehicle, there are better vehicles. It is to make their life better, by both guaranteeing some form of insurance and lowering the cost of the insurance that they will need in the future. Just like a 529 plan is a gift to a child, some form of permanent life insurance can be as well. And that is not even getting into over-funding (the amount of time the policy has been in force plays a large role in this) and the possibility of avoiding taxes in the future on your gains.
As a licensed insurance agent, and the mother of an adopted daughter, I have to tell you that to give such advice “in-general” is very misleading and very unprofessional. I have Purchased a life insurance policy for my daughter, because in her situation, we do not have a reliable family medical history, and, contrary to your statement that child life insurance is merely for “investment”, we have done so because we want to make sure that she has something in place, just in case she is diagnosed with mental illness, cancer, heart disease, or a whole other host of problems that could make her “uninsurable” as an adult, or drive the rates through the roof. It is far from being an “investment” for us.
@ Michelle
As a father of 3 and soon to be adoptive parent, as well; I personally don’t see the point. If you’re spending $10/mo on a whole life policy, then it’s not a big deal. In some cases I’ve seen licensed insurance agents selling policies to parents using the “it’s an investment” sales tactic where they were spending hundreds dollars a month on insurance for their child, rather their own retirement.
The other issue I see is the fear of “uninsurability”. If that’s the case, then how much is the face amount on the policy? Most times I see these polices the face amount is only $25-$50k. Yes, it’s something; but the reality is that it’s not anywhere close to being enough life insurance coverage.
I am glad that the life insurance for your daughter makes sense for your financial plan.
As far advice as my advice as “very misleading and very unprofessional”? It’s my opinion based on several client experiences who have been dissatisfied with the life insurance that
they boughtwas sold to them as a “good investment”. Feel free to start your own blog and share your opinion so others may benefit from your opinion.I bought a $20,000 whole policy for my 2 yo. It’s $7 per month, less than what I pay for netflix, ballet lessons, or a trip to McDonalds. I have no idea what the return or cash value will be and I really don’t care. I hope that I pay the premiums and never have to make a claim. I don’t mean to be rude, but I think you are giving poor advice. Have you considered that life insurance for children is meant to cover funeral expenses if something horribe were to happen. Is there a more horribe situation than to have to bury your child and worry about where the money will come from. I don’t have money to set aside for that. I think most people probably don’t either. I can spare $7 a month. Belive me, I pray that its a waste of money.
I do not purchase life insurance as an investment for my child. I purchase it because I know that, if my 5-year old (an only child) were to die anytime soon, I would not be able to hold onto the well-paying job I currently have. In fact, there is little doubt in my mind that I would quit my job immediately, sell my house, and move someone in the world where I could attempt to begin the process of recovery. I would need a financial boost to simply stay afloat for a very challenging grieving period. In fact, if I didn’t have it, I believe there is a significantly greater chance that I may even end up homeless.
If you are going to buy a life insurance policy, do it as soon as possible. The younger the person, the more money you get out of it. Thinking about life insurance for your baby can be a scary thought, but in the long wrong your child will thank you for protecting them and their future family.
My understanding is we get insurance to cover big events that can cost us a lot or to protect against lost income. If that’s the case I don’t see children’s life insurance being one of those cases. I’m all for using the money in an investment like a 529.
Life insurance should be used to replace income. Once you start playing around with investing, life insurance becomes a different beast.
How do you feel about IULs as a savings vehicle for a college fund or retirement vehicle?
Malcom Waters MBA
I actually find it kind of creepy to purchase life insurance for a child. When my son was first born we were hounded by Gerber and even by our own life insurance agent, but I just didn’t feel comfortable about it. I think it was just a personal thing, but I started a 529 plan with upromise savings and I contribute to that. I think that in the 3 1/2 years since his birth that 529 account has more money in it than the cash value of the life insurance would have when he turns 18 or 21 (forgot which the gerber policy is for). If something did happen to my son, I’m sure that we could find the money to bury him with out having to have life insurance on him.
Hi Jeff – I would agree with you feelings on this issue and add that it is much more important to add or have life insurance on the parents. Without the parents income to the family, planning tools like 529’s, ROTH’s, and even life insurance quickly fail. The is especially true in the case of children’s life insurance policies that will lapse without continuing premiums. With no means or no one to support these plans, what was intended as a well-meaning idea becomes nothing more than a burden on the family.
If insuring a child is important there are plenty of other options that can be had cost effectively – besides the ones you mentioned, several others include convertible child riders on a parents policy or annuity accounts that have an additional death benefit rider as part of the investment accounts. At least with these options you get the benefit of the dollars used doing double duty and providing additional short and long-term benefits. Just my two cents – keep up the good work.
Come on, Jeff. “Buying life insurance on your kid is stupid, but here’s how to do it”?
I’m not convinced buying a policy for an adult is all that bright, but choosing a policy for a kid is like choosing which black-tar heroin supplier to patronize. That guy with the alligator shoes and the gold teeth, maybe. He looks nice.
If you’re concerned your kid will eventually have health problems so debilitating that he won’t be able to get insured…should you even be having that kid? And why minimize the return on your money in the bargain? This isn’t about minimizing risk: this is about enriching an insurance agent.