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The experts who recommend against life insurance for kids generally feel the policies are outdated and there are now better options for investing in your child’s future.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.