Parents are often sent advertisements for children’s whole life insurance as part of a “rite of passage”, but unfortunately, these policies are often overpriced and provide little to no benefit compared to other options available to them.
Sometime after my daughter’s birth (thankfully), I received a mailbox full of junk mail that contained many insurance offers, including one from a huge company, congratulating me on becoming a parent. It was as if the insurance industry was waiting for parents to have children, and then the floodgates opened!
The basic premise of life insurance is that it replaces lost wages if you were to pass away. When you pay your monthly premium, this contributes to the payment that will be made to your beneficiary if you die before the end of your policy. That’s it! Life insurance has a very simple purpose; there is no magic to it.
When selling a child’s whole life insurance policy, I would lead by telling the parent how cheap these polices can be, starting at just a few dollars per month. That’s literally just a few coins. Plus, once you purchase it, you know the cost is locked in for life. Seems harmless, right?
The focus now shifts to a fear-based argument – Guaranteed insurability. What if your child develops a medical condition when they are older? What if they choose to pursue a high-risk career? If you purchase a policy now, it’s like purchasing insurance for your child and guaranteeing that they will have access to their policy without the necessity of answering any medical questions or undergoing any medical exams throughout their life.
Next comes the emotional appeal – Funerals cost a great deal of money to be held. The idea behind purchasing insurance now is to assure that at the time of a terrible tragedy you do not cause your family financial hardship while having to pay for a funeral.
Finally, the last selling point of a policy is the “savings”. A portion of the premium will accumulate cash value that is guaranteed to grow and can be accessed at a later date by your child when he/she is looking at attending college, getting married, or purchasing a home. By this point, the offer has nearly sold itself.
Now let’s take all of those same arguments, and change the order to add realism. Start with the simplest and fundamental idea – does my child earn an income that my family relies on to pay for our living expenses? No, he/she does not earn an income. By definition, if there is not going to be an income replacement, then the need for life insurance goes away; therefore, this should be enough to stop the conversation.
The argument regarding the super cheap price from a financial perspective is true. But, just because the premiums are low, it doesn’t mean that the policy will be valuable. Typical small premium amounts provide typically small death benefits. To get what you want – a meaningful death benefit – you will pay more than pocket change.
While guaranteed insurability sounds great, the reality is that true uninsurable medical conditions are extremely rare. Most non-life threatening situations allow for coverage with some higher costs associated with them; however, there are still options for purchasing life insurance coverage. Also, risky occupations frequently include group insurance coverage either through employers or unions.
Fear is a significant driving force behind the argument for funeral costs. Child mortality is very low and families will not have to incur five-figure expenses for funerals under the worst circumstances. There are options available at lower rates than those stated in the brochure, but those options are not mentioned in the brochures.
Cash value saving components on a life insurance policy can be the most misleading part. True, cash values can grow, but the rate at which cash value grows is quite slow. If you take money out of the cash value for any reason; your death benefit (should you die within the term period) will be reduced unless you repay the money you took out. In comparison to other forms of investing (529 Plans and brokerage accounts), where you have complete control of your investment, you will be much better off with 529 Plans and brokerage accounts because you can generate a greater return on your money.
This is the point at which the timeline now reverts back to the current time period. Rather than provide an insurance company “the savings” that would cover my child(s) life contingencies, I would be much better served by establishing an educational savings plan or account for my child(ren). That serves as an actual long-term expense versus a very improbable event.
Are there cases where life insurance on children might be appropriate? Absolutely. If you have a child earning an income, like in film and/or modeling, or if the family doesn’t have an emergency fund and they are paying for a high-priced funeral. Even in these cases, generally a rider added on to a parent’s term life policy can adequately fill this need in a more cost-efficient fashion.
The last word, and in this instance is purposely at the end, is as follows: Whole life insurance for children is not bad, however, for most families, there are much better alternatives to protect and plan for their children’s futures. That said, those life insurance solicitations do send free return address labels, so that is something of value.
