There is little consensus among financial advisors regarding whether children’s life insurance is a good way to spend your money.
As is the case with most financial products, there are pros and cons. That’s certainly true for children’s life insurance.
In this article, we will discuss the pros and cons regarding coverage on your kids. Then you can decide for yourself if it makes sense to insure them.
In general, the proponents of child life coverage suggest doing so for one of the following three reasons:
- Savings for college
- Funeral costs
- Future insurability
Below are the cases for and against each reason.
Savings for college
The case for: Children’s life insurance is a whole life insurance policy which means it builds cash value. This behind the scenes savings account (the cash value) will grow every time you make a payment. In addition, the account earns interest. You or the child can access this cash value later on life for college or any other financial need. Most of the time, the cash value grows tax deferred and will not result in a tax penalty when the money is withdrawn. Life insurance on children hits two birds with one stone. You have coverage on your kids, and it acts as an investment to help pay for college.
The case against: The cash value that builds up in a children’s whole life insurance policy is an inferior investment vehicle compared to other investment options. Instead of the life insurance for your child, you could take the monthly premiums and put them into a basic investment product such as a mutual fund. The contributed premiums plus growth from the mutual fund (or investment product) would far outpace the cash value accumulation in a children’s whole life policy.
The case for: Funerals are expensive. In fact, the average burial costs nearly $10,000 according to the NFDA. Quite frankly, most Americans do not have enough money in their savings to pay for an expense this large. In most cases, an unexpected death causes surviving loved ones to go deep into debt in order to ensure their deceased loved one can have a proper funeral. Albeit unlikely, the death of a child would cause a massive financial burden to most families which is why a life insurance policy on their life is a good idea. The premiums are extremely low due to their age, so even the most cash strapped families can afford this peace of mind.
The case against: The statistical chance a child will die before the age of 18 is so small that it is financially unwise to shell out money to protect against such a statistical anomaly. Yes, children do sadly die from time to time, but it’s so uncommon (as a statistical chance) that you don’t need insurance to protect against this rare event. Instead, you would be better off putting your insurance premiums into a savings account or other investment product. There is a much greater chance they’ll live well into adulthood which is why you spend your money preparing for that outcome.
The case for: A children’s life insurance policy allows the insured to buy more coverage later in life without having to show evidence of insurability. In other words, they can buy coverage 100% guaranteed regardless of their health or lifestyle. Most child life companies give the insured children the guaranteed option to buy more coverage based on certain life events such as getting married, having a child of their own or reaching a certain age. If by some unfortunate chance your child develops some serious health issues as a young adult, the option to get guaranteed coverage is priceless. Young adults who develop chronic health conditions can find great difficulty buying new coverage on their own. If they had a life insurance policy purchased on them as a minor, it would guarantee them the ability to buy more life insurance despite their health. Granted, it is fairly uncommon for young adults to be plagued with any serious or chronic health issues. For those who do experience this as their reality, their guaranteed insurability is worth more than gold.
The case against: While the guarantee to buy more coverage later in life regardless of health or lifestyle is quite nice, it is almost always not necessary. First of all, most young adults are healthy. Very few of them are plagued with any sort of chronic illness or disease or some other major health event such as a heart attack or stroke. Moreover, even if a young adult does have some health issues, many insurers still accept these risks (at a premium of course). The truth is it’s incredibly uncommon for a young or middle-aged adult to have a health issue(s) that prevents them from qualifying for a new life insurance policy. Yes, if you were uninsurable for some rare reason, it would be nice to have the guarantee to buy more coverage. That is just very rarely the case.
It is easy to see why this topic has experts split down them middle regarding their recommendations. There are strong arguments on both sides.
At the end of the day, if you are considering buying life insurance on one of your children, you’ll have the weight the pros and cons for yourself.
There is no clear-cut answer. You ultimately must decide for yourself if the value is worth the cost.