You’ve no doubt seen commercials for child life insurance policies and may be wondering whether or not it is useful or appropriate to purchase one. We understand that death is a delicate issue, made even more sensitive when we bring our children into the discussion. Buying a child life insurance policy may be a wise financial decision, but you should base your choice on your family’s needs.
Consider the Purpose
If you are considering life insurance for your children, you should first ask yourself what you think the purpose of the life insurance is. Would it be to cover funeral expenses if the absolute worst thing should happen? If so, you may want to consider adding a child protection rider onto your own life insurance policy. Coverage can be purchased in units usually at a nominal price. But remember, a child term rider on your policy will be temporary coverage and most carriers cap this rider at about $10,000 which would likely fall short of paying for a child’s funeral.
What about buying a cash value policy that can double as a college fund? These policies will build cash value over time and can be surrendered over time in order to use the funds to help with college expenses, buying a car, or even a cash graduation gift. There are other strategies like a 529 plan that may be more effective but they typically can only be used for one predetermined purpose. The cash value in a whole life policy can be used for any purpose you’d like, and it would be your decision as the owner of the policy.
Transferring Ownership of the Policy
Many parents and grandparents purchase life insurance on their children or grandchildren when they are born and then at some point in time, they transfer the policy to the child so they can keep the policy for a lifetime. For example, let’s say you have two young children that are a couple of years apart and you decide to buy a cash value life insurance policy on them at an early age. You may have also decided to start a 529 college plan for each child since the life insurance is so inexpensive.
When your children reach college age, you can fund their education using the 529 plan and then transfer the insurance policy to them as well. Your children can then decide to cash the policy in to buy a car or for some other large purchase or they can decide to keep the policy in force for final expenses in the event they should die unexpectedly.
Future Insurability Options
Another important reason why it may be a good idea to purchase life insurance for children is if there is a chance that they will not qualify for a policy as adults. If you have a family history of illnesses like hypertension or diabetes, it may be difficult for your child to find an affordable life insurance policy as he or she gets older.
In fact, some life insurance plans for children will include an option to increase the face amount at certain intervals without proof of insurability. This option could be a “lifesaver” for a child that develops a serious medical condition and cannot purchase insurance at affordable rates when they are older and need additional coverage.
The topic of health is relevant to the subject of insurance, as your health has a direct effect on your risk of mortality and, therefore, on your life insurance premiums.
Two of the biggest factors in determining health class are tobacco use and build (height/weight ratio). Smokers pay significantly more for their life insurance because it is proven that smoking directly (and indirectly) impacts your mortality. Overweight people have a higher risk of heart disease, some types of cancer and diabetes, which all impact your mortality.
So, if your child, who is now an adult, takes up smoking, and also becomes overweight cannot qualify for affordable life insurance, that policy you purchased for your child when he or she was three years old will start looking like their only option to have affordable life insurance.
While we’re on the subject of Smoking and Weight
It’s easy to tell people to quit smoking and/or lose weight when you’ve never smoked or put on some additional weight. And by the way, talking about another person’s weight is never an easy subject to broach.
Since we, as individuals, can’t seem to handle these problems ourselves, the government (both Federal and Local) are stepping in to save the day. The City of San Francisco (as well as the County of Santa Clara, CA) is helping to ensure the future health of your children (and, consequently ensuring better insurance health classes for them). The S.F. Board of Supervisors has voted (8-3) to prohibit restaurants from giving away toys with meals that don’t meet certain nutritional standards for calories, sodium, and fat. This idea is spreading to other local governments, so get ready to bid a fond adieu to, I’m happy to say, the Happy Meal.
The federal government, under the guise of the FDA, has decided that tobacco use has become an epidemic, especially with school-age children. As we apparently can’t stop ourselves (or our children), the FDA has devised a plan to scare us out of the habit. By placing pictures of diseased lungs and smokers with holes in their throats, and other graphic images of smokers with diseased body parts, the Feds are going to scare us straight (or nicotine-free). Then, they’ll probably approve a drug for all the freaked-out nicotine-craving addicts, but maybe that should be a subject for another article.
Life Insurance for Children – Pros and Cons
You would think that buying an inexpensive cash value life insurance policy for your children would be a no-brainer but many parents and grandparents balk at the idea and some are even unwilling to even discuss it. And, insuring your children may not be the best investment under certain circumstances. As with any life insurance product, there are pros and cons depending on your circumstances.
Cash value life insurance can serve two purposes. It can be a resource for the funds needed to pay for funeral and burial expenses. And, since the policy builds cash value over time, it acts as a savings vehicle that normally earns more interest than a savings account. In fact, the minimum interest paid is stated in the contract and guaranteed as long as the policy remains in force.
Some financial advisors believe that the fees associated with a life insurance policy considerably diminish the returns and a policyholder could likely earn more if they invested the premium that is over and above the cost of insurance elsewhere. This sounds a lot like “by term and invest the rest.”
In the event your child dies unexpectedly, the life insurance policy would provide the funds needed to pay funeral expenses, counseling for surviving loved ones, and income for a parent who must take time off from work to grieve their loss.
Statistically, it’s very unlikely to lose a child before age 21. It may make more sense to regularly deposit money in a savings account that charge minimal or no fees.
Purchasing whole life insurance when a child is very young guarantees that they will have at least some coverage if they become ill in later years and cannot medically qualify for affordable life insurance.
Some financial advisors believe the risk to be far too remote and the parent or grandparent has other options that require no fees to mitigate this risk.
The Bottom Line
So there you have it. We’ve presented a very good argument for insuring your children or grandchildren along with the benefits a life insurance policy on the children can provide. We also presented the other side of the equation provided by legitimate financial planners. Now it’s up to you to decide.