Do you wonder whether you should be buying life insurance for your child? This question tends to trigger debate, and which side you take depends on where you stand with regards to saving and investing, as well as how you assess future risks. While insurance is mainly about risk management, many products from the insurance industry are created with an investment component.
If you have a family, you’ve probably already considered life insurance for yourself and/or your partner. You may have met with an insurance agent who’s walked you through their products and who’s eager to sell you coverage for the rest of your family. So this brings up the question: should you purchase a policy for anyone else? Well, it all depends!
Things To Consider When Buying Life Insurance For Your Children
For adults, a primary reason to acquire life insurance is because it’ll help replace income when they pass away. Insurance money can go a long way in helping the heirs to pay off mortgages and debts, to cover funeral expenses and even to manage living expenses in the years to come. So to apply this thinking to your kids seems almost inappropriate. We don’t expect to worry about these matters when it comes to our children, so why get insurance for them? Also, most youths don’t have an income to replace, especially if they’re quite young.
The conventional wisdom here is that you only get insurance for those who have an income and have dependents. Now if your kid is the breadwinner in your family, then it’s something to think about. There are lots of families who groom their kids for the big time, and this could potentially be one case where parents would consider term vs permanent life insurance coverage for them.
Grooming your kid to be the breadwinner? Source: Toddlers & Tiaras
Definitions: Term insurance covers you for a certain time period and only pays out if you die during that span of time. It’s the type of insurance you get if you only care about the benefits, which are tied to your expiration. Your job may come with term life group coverage, as a benefit. On the other hand, a permanent life policy grows in cash value over time and you’ll benefit from lifetime coverage as long as you pay your premiums. You may also have the option of converting the permanent life insurance policy into an annuity at any time.
Insurance Coverage for Your Child’s Future?
There’s another reason why you’d consider life insurance for your kid: concerns over their future. Before you can own life insurance, you’ll typically need to be eligible for it; insurance companies normally require you to take a medical exam as a way to establish your risk status (to the company). If you’ve got a medical condition, it can interfere with your chances of getting life insurance later. But if you buy life insurance when you’re healthy, you don’t run the risk of being denied. And that’s what some parents are counting on when they pick up insurance for their kids.
One acquaintance of mine had a son who faced a chronic medical condition. My friend thus elected to purchase life insurance for him when he was a minor. As an adult, he might have encountered difficulties getting the coverage on his own, so my friend thought it was worth the money. It may be possible to take out a lower value policy for a child that increases in coverage when he becomes an adult — without the need for prerequisite medical testing.
However, if your kids are healthy and don’t earn an income, then skip the insurance. Your family might be better off with increasing your own coverage or reviewing your family’s health insurance requirements.
What About Investment Value?
While I don’t agree with it, some people may find life insurance appealing as an investment vehicle. Why? Because there’s some flexibility with permanent policies, which can be converted to annuities. Also, you might be able to take out loans against the cash value of your policy. For me though, I prefer to separate my insurance needs from my investments.
If you compare life insurance for kids to other investment opportunities, you’re likely to find more growth for your money elsewhere. A college savings plan or an index mutual fund can be a better fit than life insurance for children. If college is definitely in your child’s future, then a 529 savings plan can help you save for the school expenses plus you can enjoy some tax benefits too. Better yet, starting an IRA when your child begins working as a teenager will reap huge long-term benefits.
If you decide to shop for life insurance for kids, it’s important to remember that this is a financial product. Don’t let anyone pressure or guilt you into buying a policy if you don’t really need it (which is almost always the case).
Next Steps, If You Still Want The Coverage…
But if you’re absolutely sold on a pitch, make sure that you don’t settle for the first few offers you encounter. If you’ve got your own life insurance policy already, it may be fairly simple to ask your insurance agent about what’s available for kids. Or you may want to find out if your favorite investment firm offers such products.
No matter what ages your kids are, it’s difficult to consider eventualities that include a need for life insurance. Before you sign up for any kind of coverage, consider the benefits and costs versus those of other (appropriate) financial products. Finally, I would recommend a 529 college savings plan or another kind of savings account for a child over a life insurance policy that’s purchased for investment purposes or future savings goals.
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