We receive this question a lot from parents. Scour the internet for “life insurance for children” and you will read some scathing reasons from financial “experts” why purchasing life insurance for children is a waste of money. Some of the reasons they state we agree with. Yes, we do! However, these experts are missing an important component of life insurance that makes coverage on children beneficial. In this article, we discuss the benefits and when to buy life insurance for your child. We also discuss when you should not buy life insurance for your child, too.
Many financial experts and planners make confusing statements about life insurance. We see this confusion more when you buy life insurance for your child.
The first one: many of the blogs describe life insurance as an investment. Life insurance is not an investment. A mutual fund is an investment. A stock is an investment. Life insurance is risk protection. Let’s get that out of the way.
A little bit later, we will describe the different types of life insurance available to children. One option is term life insurance. If you know anything about term life insurance, then you know that term life is NOT an investment. This is like saying your homeowners or auto insurance is an investment.
The second part is that the experts suggest you should put that money elsewhere, like in a 529 college savings plan. We could not agree more! You should open and contribute a 529 plan for your children! However, the experts seem to imply that the premium money you save will be much more than the value of life insurance. Let’s test that. A $50,000 whole life insurance policy on a newborn boy might cost $30 per month. Let’s say, instead, you put that money into a 529 plan each month that earned 8% annually on average. How much do you think you will have in the account in 18 years when the boy is ready for college. Do you think it will be more than $50,000?
The Answer Is…
No. You will have a lot less. You’ll have a little more than $14,000. In 18 years, who knows how much college that $14,000 will buy. With the child life insurance, assuming good health, the child will have day 1 coverage.
Some also suggest that burying a child is inexpensive, so you should have the money on hand. Like in an emergency fund! Geez…we would all like to have the money on hand. However, many don’t even have emergency savings at all! If you look on the internet, many people can’t even spare $500 to pay for an emergency. We aren’t talking the poor here. Rather, middle-income Americans. Where will the money come from? A church collection? Borrow from your home equity? GoFundMe? Maybe a retirement account, I suppose…Fact is, burying a child does cost money and most Americans don’t have it on hand.
They Are Right About Some Things, Though
The “experts” are right about some things, though. They say there are better ways for life insurance on kids and children.
You have seen some of the marketing mailers. Paraphrasing, “What better way to show your love than to buy life insurance for your child.”
Honestly, there are better ways to show your love (well, it does to a point as we will describe below) than the purchase of life insurance on children. (We will get into the 2 important reasons why you should buy life insurance for your child in a bit). There are better ways to show your love. Take your child to do something special. Spend time with them! Gosh, purchase more life insurance for yourself!
Purchasing life insurance for children doesn’t show them good financial sense, either. Let’s be honest. A life insurance policy is purchased and then put in a file drawer for safe-keeping (I hope). Most times, the child doesn’t even know he or she had a policy until adult age, when the policy is transferred to the child.
Do you know how to show your child good financial sense? Talk to them about wants versus needs. Explain how money works. Bring them to the supermarket and explain your purchasing decisions. Explain why you need to delay the purchase of something they want. Talk to them about the reasons why you and your spouse work. Kids are smart; even show them your budget, too, if you have one. But, purchasing life insurance to show them good financial sense? No.
I received some marketing materials the other day from a carrier that said my child could use the cash value within the policy for anything he or she wanted. First, I don’t want my child to know about any cash value. Time and time again, parents tell me that their son or daughter cashed out the life insurance policy. (A preventable practice by establishing good financial sense with your child early.) Simply purchasing a life insurance policy doesn’t cut the mustard.
Second, honestly, any cash value is going to be rather skimpy. Don’t expect to have tens of thousands in cash value. You will be lucky to have $3,000 or a little more by the child is 18.
Why Should You Buy Life Insurance For Your Child
There are really only two reasons you should buy life insurance for your child.
The first is that, unfortunately, children do die. Having some type of life insurance policy will mean that funds are available. Yes, the probability of a child’s death is low…thankfully. Does that mean you should ignore it? If the worst-case scenario happened, how would you pay?
The second is to guarantee their future insurability. Some experts brush this away like it is no big deal. But it is a big deal. This is important. Let’s say your child develops a condition which renders him or her rated or declined as an adult. Juvenile diabetes always comes to mind. If your child develops juvenile diabetes, that is generally a decline for individual life insurance as an adult.
Some policies allow your child to purchase more life insurance in the future, as an adult, without any evidence of insurability. These are the kinds of policies we like. It is an option. So, if your child has a debilitating condition as an adult…doesn’t matter. He or she can purchase life insurance. This is how you show your love to buy life insurance for your child.
And, let’s hope not, but there is money in place to bury your child if the worst-case scenario should happen. Maybe there is some extra available that you can take time off or get some counseling. I have three children myself, and I know I would.
Why Should You Not Buy Life Insurance For Your Child?
If you are very affluent, then you probably don’t need to purchase life insurance for your children. You have money for the worst-case scenario. But, most people don’t.
Also, if you don’t have your stuff (saying it nicely) straight on your own finances, you shouldn’t buy life insurance for your child. Most adults don’t have enough life insurance for themselves. Purchase some. Or buy some disability insurance if you don’t have any. Did you know that you are more likely to face a long-term disability than die unexpectedly? There are better ways to show your love to your children. Getting your own financial stuff straight in one way to do that.
Should The Grandparents Buy Life Insurance For Your Child?
This is an option. Many grandparents want to do something for their grandchildren. One way is to contribute money to a 529 college savings plan. (Yes!) The other is purchasing life insurance for their grandchildren. The grandparent would be the owner of the policy. If you are comfortable with that, that is one option. If you want to learn more how this would work, please contact us.
Life Insurance Options
You might hear that you should purchase a universal life (UL) or indexed universal life (IUL). Don’t bother with these types of insurance products. Sure, they are “permanent”, but some of the complaints you hear about whole life insurance are actually about UL policies. They are structured differently than whole life. If you pay a minimum amount each month, the policy may ultimately implode (i.e. the cost of insurance would be so great that you would have to make a large lump-sum contribution to keep the policy solvent.) In our opinion, they are rather complicated compared with what you are trying to do. Simply to buy life insurance for your child in case of the worst-case scenario or for future insurability.
There are really two types of life insurance products that we recommend for children: whole life and term.
Children Whole Life Insurance
Just as it sounds, whole life is designed for the insured’s whole life. If you can afford whole life, that is great. You may spend around $30 per month for a $50,000 on a newborn boy and $20 for a newborn girl. Whole life will have cash value. The cash value which will grow, but, as we said, don’t get too hung up here. What you want is a policy that offers a future purchase option that the child can purchase (when an adult) with no evidence of insurability. And, if the child never has to use it, great.
I am not much of a proponent of whole life insurance, but it makes senses to have it on a child. Premiums are low. (Sorry, “experts”. What can a family do with an extra $10 to $30 per month which I previously described?)
Whole life has level premiums. The premiums periods are for life, 20-year pay, 10-year pay, or pay to age 65. These options are “paid-up” options. Contact us to learn more about these options.
Children Term Life Insurance
Term life is designed to last only a set number of years. For children, though, the term life insurance usually lasts up to age 25 or 30. You want a term life insurance policy that will convert to whole life with no evidence of insurability. Nearly all juvenile term life policies offer this option. However, you also want a policy that, once converted, will give you guaranteed purchase options. These options come with no evidence of insurability.
Term life is very affordable. A $20,000 or $25,000 term life plan may cost $25 to $30 a year. (Maybe a bit more depending on the carrier). Yes, a year. How much college will $30 a year buy in 18 years? Just over $1,100. That won’t buy a lot of college at all!
A word to the wise. You had better have life insurance for yourself. A carrier will not approve your child if you have little to no or very little life insurance on yourself.
The decision to buy life insurance for your child is not as straightforward as it sounds. It is a case-by-case basis. Our opinion, though, if it works for you, yes you should buy some for two reasons:
(1) children do unfortunately die. You will have money in case this happens.
(2) more importantly, your child has a future purchase option with no evidence of insurability. It is like a “call option”. If your child doesn’t need it, great! If so, though, the ability to purchase is there.
Are you considering life insurance for your child? Do you need assistance with determining which carriers are right for you? We can help. We can also help if you are on the fence. Some children don’t need life insurance. Other parents need to focus on their own financial situation before considering life insurance for their child or children. We only work in your best interest. Contact us today or use the form below.