Since we completely ignored the fact that there was a Holiday earlier this week, we'll take a minute to wish everyone a belated Happy Halloween (it's even more embarrassing that the last article to drop came out on 10/31). Unless you the one around the office who spends an hour or more before work dolling yourself up for the Halloween customs you planned out almost a year in advance, you're biggest memory from earlier this week was likely taking your kids for an after-dark walk around the neighborhood to beg your neighbors for candy that would keep the kids up all night. And since we're already on the topic of children, we figured today would be a great day to talk about the kids and buying life insurance for them. Nothing scary or controversial there. 😉
So this topic has been debated (somewhat passionately) for years. Some argue forcefully in favor others argue forcefully against it. The traditional naysayers suggest that it's sick to purchase life insurance on your children as the thought of “profiting off their death” is sickening. Still others like to point out that since you don't typically rely on your children as a source of income, it would appear meaningless to purchase life insurance on them. Are they right? Is a life insurance policy on your children just a good ruse devised by an insurance agent who came up with a way to boost his case count and make a quick extra buck here and there? I actually used to sort of think so (gasp!). But then something happened that made me change my mind.
Way Back When
When I was a young insurance agent fresh out of college I had a much more CNBC approach to my practice. I liked talking a lot about investments and followed the idea that child life insurance wasn't all that useful because
- You didn't rely on them for income
- Most people bought small policies that never really had an impressive amount of cash in them
- If you wanted cash, especially for college we could use a Coverdell ESA or 529 (yikes! Please understand I hadn't a clue what infinite banking was at the time).
I had this one prospect that was actually a give me (the only one I ever got from my career shop agency) who was looking into a new policy on herself and policies on all of her children. We had a brief conversation about the policy on the kids, and I pretty much poo-pooed the idea. Later that day I was having a conversation with my General Agent (as I did a lot back then) and the topic of life insurance on children came up. He then shared a thought with me that I hadn't even considered. The thought was shared in the form of a question, and it came like this: “If one Friday afternoon you got a call from your wife telling you that the unthinkable had happened to your child, do you think you'd show up for work on Monday?” Suddenly all of the math stopped mattering and I started to think about all the people I had told not to worry about this sort of thing and the horrible amount of damage I could have done.
I know some people who lost a child at a very young age, and I've witnessed the way it can irrevocably change people. Life insurance on children isn't about profiting off their death. As anyone well read in insurance knows insurance indemnifies lost, you cannot profit from insurance. This is why you have to prove an insurable interest when the policy is issued. It's also not about making up for lost resources they bring to the table. It's about providing you with the money you'd need to take the time off from life in general while as you cope with what will amount to be one of the darkest periods of your life. It's about affording yourself the dignity to grieve without having to worry about how many personal days you have remaining. Of course, the cold and unrelenting world of Wall St. aficionados doesn't compute an input of human emotion. It's raw numbers of logic and math.
…I want the Money!
But for the math types out there, let's dive into the numbers (sort of) for just a second and address the living benefit powers of life insurance for your children. One of my favorite stories from an annuity wholesaler came from a guy who sold annuities for one of the big mutuals. When I met him a few years ago, he'd been with the company for years, and when he met with me an a few other agents he told us the following story.
Several years ago when his son was first born, an agent he had worked with for a few years called him up and wanted to go out to lunch. While they were at lunch talking about the new baby, the agent pulled out a small stack of papers and threw it down on the table. The stack of papers was a policy illustration for a whole life policy. The agent looked at him and said, “Now, just look at the guaranteed cash value [read, the boring part] when he gets to age 50, 55, 60, etc.” The guy looked over the numbers and started to realize that just the boring part of the policy did quite well, say nothing about the dividends.
Every year around the kid's birthday, dad and mom get the annual policy statement, and every year the cash value increases. In fact, it's done a bit better than originally projected.
As an agent that has sold plenty of juvenile policies now, I can tell you it's one of the most selfless things an agent can advocate. There's little money in those relatively smaller policies, but what they can accomplish over time is quite substantial. We know that time lost can never be regained, and as cliche as it sounds, if I had a dollar for ever time I've been told “wow I wish I had started doing this sooner” I'd be retired already. Nothing helps build wealth more than time, the investment guru's won't even take issue with that idea. If you think the compounding nature of participating whole life insurance is awesome when you start in your 20's or 30's. See what it looks like if you have an extra decade or two before that on your side–I'm not going to bore people with projected numbers, take a look yourself though, the numbers will astound you.
When Good Kids Go Bad
Like it or not, insurance is about bad things happening and how to deal with it. I'm trying to break up the negativity here a bit, but one other consideration behind juvenile life insurance policies is the fact that not all good young kids will remain that way. Not too long ago, over on the insurance agent's forum we had an agent come along looking for a carrier that might consider a kid who was on probation with all sort of legal troubles. At around 20 years old junior was a wild child, and mom and dad suddenly found the value in life insurance on their son. Trouble was, his reckless behavior made him pretty much uninsure-able with every carrier out there.
It's a difficult topic for an agent to tackle with parents, especially of young children, but Johny and/or Suze may not stay civil bundles of joy forever. And if they head down a destructive path of drugs and trouble with the law, even if they repent and start anew, the damage regarding their ability to insure their lives lingers for some time.
Building Your Castle
Insurance is about dealing with the unknown. Risk effects your children and their futures just as much as it effects you. The measure of human worth is less about what you can provide to yourself, and ore about what you can provide to others. We believe in that strongly around here (we don't get paid to maintain a blog, and it probably shows from time to time). Life insurance on your children has the multi-use effect of protecting your ability to grieve if the unthinkable happens, ensuring some very stable cash for them in the future, and solidifying their ability to have life insurance coverage.
It's not about relying on the kids for money, and it's certainly not about profiting off their death. Anyone who thinks it is has some serious emotional baggage they need to address. In fact, to even make that comment raises questions about just what type of person you really are. And sometimes, discovering your true self can be the scariest thing known to mankind.
Happy very late Halloween, and to those who don't celebrate it or any other holiday, please disregard this last line.
Brandon, I’ve been skipping around reading articles on your fantastic blog here and there, and I’ve finally started to go through it chronologically. When I got here to this one about life insurance for kids I decided I’d share my thoughts.
We purchased 10-pay whole life policies on our girls when they were ages 9 and 10. We’d have done it earlier if we’d known about it – The premiums are much less expensive for the same coverage at my age. The primary reason was guaranteed future insurability – but those policies will pay 50K (well, more after PUA and dividends) and could potentially provide the seed for their own private banking policies later in life. What a gift that would be!