Sheri and I have a blended family. Between the two of us, we have 7 kids and 5 grandkids, the latest arrived Wednesday night at 7:30. She’s beautiful just in case you were wondering! Her arrival reminded me of a question I’m occasionally asked by people who are evaluating life insurance after the birth of a child, and that is, should they get a life policy for their new bundle of joy?
Depending on who you ask, some insurance agents and financial planners believe you should, while others don’t. Those who recommend getting a life policy for a child do so for three reasons:
- Savings for a college education
- Provides life insurance if they become uninsurable at any time
- Funeral expense if the unthinkable happens
The insurance agents and planners who do not recommend life insurance for a child or children believe the following:
- There are better ways to fund an education
- The odds of a child becoming uninsurable as an adult are minimal
- Childhood mortality rates in the US are incredibly low
- There’s usually no need to replace income from a child
I do not recommend parents, or grandparents for that matter, buy a life insurance policy for a child or grandchild. The reason I recommend life insurance to parents is to replace lost income from one of the parents. This income could be used to pay off a home or pay for the expenses of raising a child or children, including a college education. I don’t know of any families who are financially dependent on their child’s earnings even if the child is a model, actor, etc.
A life insurance policy is not a great savings vehicle for a child’s education either. Projected (this word is important) rates of return on whole life policies are around 5%. There are much better savings vehicles such as a 529 plan or mutual funds. The same holds true if your goal is to provide a financial leg up for the child to buy a house or make some other major purpose upon becoming an adult. In either case a professional financial advisor can help you find better ways to accomplish either of these goals.
In cases where a parent still wants to have some level of protection on their child or children, I recommend a child rider on the parent’s life insurance policy. This is optional coverage that provides an amount of life insurance on all the children in the household, usually to a set age such as 18, should the unthinkable happen.
What do you think? Share your thoughts, experiences, and questions with us in the comments section of our blog or on our Google + or Facebook pages. I’d love to hear from you!