From time to time clients email me with some fantastic questions. One such question arrived about a month ago - "Should we be considering the purchase of life insurance for our child?" This is a great question and one that's been asked by many parents, I'm sure. So let's talk about the answer with this month's newsletter.
First, understand that the overwhelming majority of life insurance is purchased with one goal in mind - to replace (financial) contributions an individual makes to a family. These contributions may be directly measurable with money, such as income from a job that pays the mortgage, grocery bills, kids sports fees, etc., or they may be more difficult to value financially, such as chaufferring kids around, cooking meals and/or providing care for a loved one. At its core, life insurance is purchased so that if someone we love and depend on doesn't come home tonight, their loved ones (to some extent) can be relieved of the finanical burden they may otherwise face as they grieve their loss (Yes, there are other reasons life insurance is purchased but we're speaking strictly now to parents of small children).
So, do children provide any of the aforementioned contributions? With a few minor exceptions, the answer is "no." They generally don't help pay the family bills and again, with minor exceptions, they aren't making substantial contributions to the maintaining of a home or the care of a loved one. Indeed, the loss of a child, difficult as it may be for a parent, would generally not leave the family worse off, financially speaking.
But another argument goes that the purchase of life insurance for a child is a good idea since you can "lock in insurability." In other words, life insurance sales agents suggest that you should buy life insurance on your child now, while they're young and healthy, because they may develop health issues in the future that would then make them uninsurable. "It's what a loving parent would do," they'll say. While there may be some truth to the possibility of a future health issue developing, the reality is the onset of health concerns for children is a very, very small incidence. And even if you did buy life insurance on your child, you couldn't buy very much. You see, a life insurance company will only write a policy for an amount that could reasonably be defined as an "insurable interest." In other words, you can't write a $1 million life insurance policy on a child because nobody is going to be "economically disadvantaged" to the tune of $1 million by the loss of a child's life.
But what of those small life insurance policies that are written? The truth is most of the policy premium you are paying each month for those types of policies is going to things like policy issues & administrative fees - fees that have a set price no matter the face amount of the policy. Indeed, most life insurance policies on children are only written for amounts like $10k, $50k or 100k - amounts more in-line with paying for funeral costs and maybe some time for grieving parents.
For these reasons I, and probably 98% of fiduciary advisors, will not recommend purchasing life insurance on children. In fact, in the 15 years I've been doing this, the only times I've had a client buy life insurance on a child was as a nod toward a "family tradition." Their parents did it for them and so they wanted to do it for their kids. They knew it didn't really make sense but "that was just what we do in our family." Since the cost was small, I didn't really fight it very hard. Beyond these purchases, however, I have never advocated for the purchase of life insurance on children.
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