Ask any group of parents, life insurance professionals or financial planners about purchasing life insurance for children and you will find you’ve opened up an extremely controversial financial topic. Some will claim that life insurance should only be used as an instrument to replace income while others will be horrified that you would even consider getting a financial benefit on the death of your child.
Of course, there are reasons for buying life insurance that go beyond the death benefit, but there’s nothing wrong with listening to all the differing opinions and using that information to help you make the decision that is right for your family.
Why buy insurance on a child?
I don’t know any parent who wants to think about the horror of losing their child. That’s one reason buying insurance for your son or daughter is such a difficult subject to broach.
When my oldest daughter was born, I made the decision to purchase a small whole life policy through Northwestern Mutual Life. The premiums were under $13 per month for the policy and it included a rider that would allow me to increase the insurance amount at certain times during the life of the policy. This guaranteed her insurability at reasonable rates for a more substantial amount without requiring we purchase that amount initially.
I chose Northwestern Mutual because it is a very respected company that has paid a dividend to its policyholders every year since 1872. Dividends aren’t guaranteed, but the company’s track record is solid. I also went with NML because prior to getting married, I was a Northwestern Mutual agent. I knew the products very well and I’d had a chance to work with families while they struggled with the very decision I was facing.
Whole life is a multipurpose financial tool
Why didn’t I just save the money? I never once fooled myself into thinking the purpose of this policy was to accumulate money. That feature was simply a very nice bonus.
The amount I put aside for the insurance purchase didn’t prevent me from contributing to either a regular savings account or a 529 savings account in my daughter’s name. That $13 each month wound up serving three purposes – it provided a death benefit, it guaranteed insurability for a small amount of future income replacement and it accumulated cash value – three things a savings or mutual fund contribution can’t do.
The goal isn’t to replace all of their future earnings
Some advisors say that if you’re going to guarantee your child’s insurability it should be in an amount that will someday equal their potential income. This is a pretty extreme position in my opinion.
Insurance for a child guarantees that they will be able to provide some small amount of income replacement for their future family. It isn’t necessary to replace it all. We can’t plan for all of life’s eventualities as much as we might like to.
Other advisors will claim that such a small percentage of people are completely uninsurable that it isn’t worth planning for this possibility. That may be true, but there will be a much larger percentage of the population that will face steep premium penalties based on their health or lifestyle choices. For example here are some facts from the Centers for Disease Control:
- 22% of American middle and high school students smoke cigarettes
- Children and teens aged 12 to 20 years consume 11% of all alcohol sold in the US
- 30% + of adolescents and teens are either overweight or obese, with 70% of those having at least one risk factor for cardiovascular disease
- 1 in 400 children will be diagnosed with diabetes
All of these factors can lead to early onset of adult health problems that might not prevent these teens from eventually buying insurance, but may prevent them from being able to purchase insurance at reasonable rates. .
If this is something you’ve considered look for these features:
Buy whole life from a mutual company
The best option for this type of purchase is a whole life policy through a mutual company. Mutual companies are owned by their policyholders. Financial decisions are made to benefit the policyholders through the payment of dividends. This makes it much more likely that the policy will have the cash value that is illustrated on the chart you receive at the time of purchase.
Assign your dividends to purchase paid up additions
There are different ways to use the dividends received from a whole life insurance policy. You can take the dividends in cash, use the dividends to reduce the policy premium, allow them to accumulate and earn interest, or you can have the premiums purchase paid up additions of insurance.
The first three methods are self explanatory, the last option is fairly simple as well and when the dividend is paid often enough, this is where the cash value really accumulates. With paid up additions, the dividend purchases an amount of insurance that requires no further premium payments at the insured’s current age. These paid up additions also earn dividends. This is the option we chose and because of that decision the cash value in the policy has grown exponentially.
Add a guaranteed additional purchase rider
One rider that can help extend the insurability protection of your child without requiring a large insurance purchase up front is an additional purchase rider. This will allow you to start small and add greater income protection later in life without being required to provide proof of insurability.
The amount of money it cost each year to protect my daughter was so small I didn’t have to think twice about it. When my younger daughter came along two years later, I bought her a policy too. It is hard as parents to take the emotion out of decisions we make for our children, but this is one that will benefit from a logical approach. Don’t ignore those advisors who speak from extreme positions, but temper their advice with a huge dose of common sense and you should be fine.