Life insurance for children is a topic I’ve discussed in the past, a few times. And while I mostly agree that a lot of agents (and consumers) often get things backwards in terms of what, how, and even if this should be done. Categorically declaring against it is neither helpful nor heroic.
This is the third item on the Market Watch piece; let’s set the record straight.
Life Insurance for Children: Need vs. Want
Your child probably doesn’t need life insurance in the same sense that I probably don’t need to own two cars. I have to pay maintenance on both which is generally twice as expensive as simply owning one. But, certain things have afforded me the ability to own two, so I have them. There is a certain convenience and safety in this as one car is certainly not well suited for winter driving nor is it all that practical for certain common things most people have to do on a frequent basis.
So on the list of priorities, life insurance on your child is not as high as other major to-do items. Still, this doesn’t mean it’s completely off the table, or even a bad idea if finances afford you the opportunity to do it.
Agents do Mess this up
I’m not exactly siding with the common insurance agent on this one. A lot of them sell parents on the idea of life insurance for their child simply as an add on sale to make a little extra money or help qualify for a bonus for the number of lives they write policies on.
Worse yet, or the suggestions that life insurance be sold on a child for something like college planning because the child is so much younger and benefits from lower insurance costs (this is very very wrong).
But since questionable motivations are not unique the this situation of life insurance sales, nor life insurance in general, I don’t want to belabor this fact, merely point out a potential pitfall for the unassuming consumer.
When it’s a Good Idea: Death Benefit
For the most part, you are not dependent on the economic achievements of your child. There are a few rare circumstances and they would qualify a life insurance purchase in a completely different way. But simply not being dependent on junior’s ability to turn out an income doesn’t make the potential loss from his very unfortunately—and premature—death something that cannot nor should not be insured against.
Chances are pretty good that if your child passed away on a Friday you won’t be reporting for work on the following Monday. Having a kid die does weird things to people, and mourning process is generally long.
So the loss isn’t about what the child brought to the family finances at all. It’s about the loss you’ll incur when you are sick to your stomach with grief and can barely manage to crawl out of bed and offer up a half smile to your friends and family when they arrive to offer their condolences.
When people close to you die unexpectedly, you have a high chance of doing whacky things. I’ve been there and done that. Adding financial pressure to your life doesn’t make your decision making any less insane.
When it’s a Good Idea: Giving them a Gift they can’t get Elsewhere
There is a decent cash accumulation aspect to life insurance when purchased on a child. And the death benefit that comes with the policy removes some doubt from their future regarding insurability. We have a few clients who have found themselves in circumstances where they became uninsurable a lot sooner in life than they ever imagined.
The accumulation aspect will be limited by several factors, so the likelihood that you’ll be placing several thousand dollars into a policy is small. But, just because the incoming numbers are small—and therefore the overall numbers are generally smaller—doesn’t mean the magnitude is any less. All of the benefits life insurance affords are still intact, just on a smaller scale.
They aren’t going to get rich this way, but they also won’t get rich with any other option at the same savings amount.
Still, don’t go overboard. There is a whole lot more benefit you can offer your family if you remain mindful of what proper insurance on your own life brings to the table. There is no real savings in terms of insurance cost by loading a bunch of money into a child on your newborn. Insurance companies are well aware of the fact that there is a huge unknown, which infers a huge risk, in placing life insurance on your child—and it’s for this reason they tend to limit policy size.
Mind your other Priorities
Do not ignore your other priorities. If you’re not saving for your own retirement, don’t have an emergency fund, and/or are drowning in debt, you’re better off skipping this one. As we already covered it’s discretionary. Life insurance for your children can be a great decision, but it can also wait if you have other more pressing matters.