On television, you may have noticed the Gerber commercial that talks about buying a life insurance policy for your child.
Ask any parent how far they would go to protect their child and most would tell you as far as they have to go.
Ask any financial expert if buying life insurance for kids makes sense and you might get an earful with half voting ‘yes’ for insurance and the other half voting ‘no’.
For me, I’m definitely on the ‘no’ side. Why you ask? We’ll get to that in a moment.
The Plus Side
Many argue that purchasing a life insurance policy for your child is a low-cost money move that will be beneficial in the future. It can be an effective plan for the future should the child grow up with health problems or have a family history of health problems that would make it difficult for them to get insured as an adult. Generally, life insurance is based on the amount of income you earn. Since you can not make an accurate assumption as to the amount of money your child would make in the future, you can use your own income as a guideline.
The Down Side
The experts who recommend against life insurance for kids generally feel the policies are outdated and there are now better options for investing in your child’s future. They feel that other resources like the 529 plans can be better suited for future savings. Not everyone is buying their children life insurance policies today. If there is coverage, it’s generally only to cover the costs of burial if something should happen, typically around $5000.
Personally, I’ve come across several clients that were “sold” life insurance policies for their kids to have insurance on them as well as a savings tool for when they get older. Now that the kids are older, the parents are disappointed (I’m being nice here) that the cash value hasn’t accumulated nearly as much as they were led to believe. If you’re being sold life insurance as investment stop and remember this:
I have not and do not intend to take out a life insurance policy on my kids. We started 529 plans for both as well as custodial accounts that we’ve used to purchase stock certificates. As they grow older, I’ll also plan to open Roth IRA’s for them as soon as they have earned income (Dad’s ready to get them on the payroll 🙂 ) From my end, I just don’t see the need for life insurance on them. Amy I wrong? I’m sure others have their opinion on the topic, but it won’t make me change my mind.
How to Purchase a Child’s Insurance Policy
If you absolutely feel that you have to have some sort of life insurance on your child, here’s a strategy that many financial experts can agree with. In addition to having a life insurance policy, utilizing other savings tools is also good financial practice. A parent’s best bet is to purchase a 20 year term policy that is renewable and can later be converted to whole life insurance.
For instance, a $10,000 policy can be later increased to $280,000 worth of insurance coverage. As an adult, the child would have life insurance coverage without medical tests and procedures. Some also use life insurance policies as a way to invest money tax-deferred. Since you are taxed on the gains of the investment, the first withdrawals are from the tax-free premiums. This will not be a replacement for when they have a family and need 1 million in life insurance, but if they have any health problems it does give them something.
After you have used all of the premium funds, you can take a loan against the gains tax-free also. You will have to keep the policy for your lifetime or you have to pay taxes on the amount taken.
Not a Guilt Trip
Unfortunately, there are unsavory agents that will take advantage of a parent and use guilt as a sales tactic. When I hear stories like this it sickens me. Purchasing life insurance is a financially smart move and should not be done simply because you love your children.
However, if you as a parent do not have adequate life insurance coverage yourself or not enough going toward your retirement accounts, you should not spend the cash on insuring your children.
In the event something does happen to you, your child will have nothing to fall back on. Review your own insurance needs, especially as your family is changing. Speak with your insurance agent or financial advisor and make sure the amount of insurance you have is adequate to cover your own needs before purchasing a child’s policy.
The policy is subject to substantial fees and charges. Investment portfolios are subject to market risk. Death benefit guarantees are subject to the claims-paying ability of the issuing life insurance company. Loans will reduce the policy’s death benefit and cash surrender value, and have tax consequences if the policy lapses.
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.