Should you buy life insurance for children?
No. Never. Forget it. Bad idea. Life insurance is a tool to protect your family. There are two ways this tool helps your family.
1. Protecting You from Estate Tax
This is what whole life and universal life are for (and these insurances are ONLY for that purpose). With the recent change in estate tax law allowing people with up to $5 million to die estate-tax-free, fewer and fewer people will need whole life, thank goodness.
2. Providing Income when You Can’t
The second reason you buy life insurance is to replace income in case you aren’t around to produce it — and people you are responsible for depend on your income. (People usually buy term insurance for this purpose.) That’s it. There are no other reasons to ever buy life insurance.
So, unless your kid is Justin Bieber, you don’t need life insurance for your children because they don’t have to worry about income replacement or estate tax issues. They’re hopefully too busy being kids. They aren’t out there earning a significant amount of money, so why would you need life insurance?
Of course this is where the crafty insurance agent who sells permanent life insurance will sometimes step in. He’ll try to convince you to buy universal life insurance for your kids as “the best investment you can make.” Do not fall for this, please. If someone starts talking about this to you, just tell them to shut up and show them out. Say nothing. Fake appendicitis if you have to. Just get rid of them. They are snake oil salesmen and nothing more.
Here’s why I say this. Arguing that children need life insurance rests on the argument between term life insurance vs. whole life insurance.
Whole or universal insurance is often presented as insurance with a savings vehicle. The misguided salesperson tries to convince you to use this insurance as a way to save for your kids. I like saving for kids, but I hate life insurance for the little tykes. Even though the life insurance costs are relatively low for youngsters, it’s a complete waste of money unless you are Mama Bieber.
The problem is that the administrative cost of the life insurance is so heavy that it eats into any returns the savings makes. Also, the investment choices that universal insurance offers are very limited.
If you are interested in saving for your children’s future, which I am sure you are, why not do so with the lowest cost and greatest choice? Making a conscious choice about this is also a great way to teach kids about money. Don’t saddle yourself with crappy insurance for kids. It’s a complete waste. If anyone tries to tell you otherwise, they are insulting your intelligence.
Now do you want me to tell you how I really feel about this?
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{ 25 comments… read them below or add one }
Neal,
I literally couldn’t disagree with you more. I recently bought Life insurance on my soon to be 4 month old.
http://www.myjourneytomillions.com/articles/why-i-will-be-purchasing-life-insurance-on-my-newborn-baby/
The main reason is – I am not going to work if my child dies. It is that plain and simple. Am I taking off 2 weeks? No more like 2 months? Maybe a year. If they had a sibling could you imagine leaving that surviving sibling so you could work? How could you possible focus?
Another reason would be Guaranteed insurability:
I have a buddy who was diagnosed with type 1 diabetes at 19…his term policy now at 30 (with a wife and kid) is a couple hundred bucks a month and he is likely to be underinsured. If his parents bought a similar policy to mine he could have increased insurance without having to be tested
I know we have differing views on Life insurance in general but even if you have the view that life insurance is only set up to replace an income then this type of policy is replacing YOUR income because you aren’t going to work for a long long time.
Evan, You do make a good point but I still think this is not a good use of money.
You certainly could be right that a child could develop a condition that later makes them uninsurable but I think this is statistically not a great risk. Most people are healthy thank goodness.
Also, nobody knows how we react to this kind of tragedy. If someone stays out of work for 2 months — ok…so that’s about $10k to $30k. Right? If you feel it’s important to buy that much insurance, I can’t fault you but I wouldn’t recommend it. I’ve read stories about people who go thru this kind of thing and they often report that the best thing to do is to go right back to work. In this case, having insurance would allow someone to stay away and isolate — the worst possible thing for the survivor and possibly the last thing the poor child would have wanted for the parent. All of this is conjecture of course.
Yes…we do differ on this issue but I always enjoy your wise input. Thanks.
Neal, I used to be a pharmaceutical rep and promoted a diabetes drug. One of the statistics about the prevalence of Type II diabetes is this: Of infants born in 2005 in the U.S., one in three (33%) will develop Type II diabetes during their lifetime because of genetics, diet, lack of exercise and obesity. The current prevalence of diabetes is 8.3% of the adult population. That is a staggering increase for those infants born in 2005. Many of them will be uninsurable because they will be insulin-dependent and have developed other co-morbidities. Just something to think about before you rule out the idea all together by saying future uninsurability is not a great risk.
Teri,
Your comments are enlightening. Certainly worth considering…… Do you believe that these health problems can be marked by the parents? In other words, sick parents probably should consider this coverage but what about perfectly healthy parents?
Neal,
Diabetes definitely has a genetic predisposition. Therefore, I would certainly encourage those parents who themselves have diabetes or it runs in their families to strongly consider purchasing life insurance for the children.
One other little thought of piece of info for you to chew on…not saying that it warrants purchasing a policy for a child but just food for thought. People can also be uninsurable based on occupation and hobbies. For example, those who work on the oilfield industry (especially on offshore rigs are usually either uninsurable or their policies have numerous exclusions and are terribly expensive. This occupation comes to mind because I live in Texas and the oilfield is booming right now. Also, those who recreationally participate in skydiving, bungee jumping, piloting, etc are uninsurable because of the high risk activities. Again, not saying future occupation is the sole reason to get insurance on a 5 year old, but just something to think about.
I thought of Evan’s post soon as I saw your article’s title. I’ve though about this, and with the one daughter, if she perished, I have the cash it would cost to see a good shrink every day for the rest of my life. The kind of policies sold on kids isn’t worth the money.
For long term investing, put the money aside and invest it for real. Jane 2.0 is 12 and had good babysitting income this summer. Her first Roth IRA was the result. She will have more in her account when she graduates college than most retirees have at retirement.
Joe
I’m with you Joe. Nice job w/Jane man. Can I send my kids to you for the summer?
I dissagree with you Neal. Life insurance also covers the cost of the burial. What if you don’t have enough money for the cost of the burial? Would you rather make monthly payments for years to come (if they even allow that.)… or have the burial expenses paid for? (Casket, Outer container etc… even if your being creamated; it’s aproximatly $6,00.00 – $10,000.00.)
You are way off here….. I’ve sold life insurance in the past and you need to know your client as each situation is unique to that person/family.
Christine, I respect your point. I really do. Fortunately, this happens so infrequently that it’s not an issue for most of us. As you can see by a comment made above, this happened to Joe tragically. I also agree that you need to know your clients and I’m thankful that you do that. If a client needed this coverage, term should be the coverage of choice. IMO
Bad advice. My child was hit by a car while riding his bike and died at 9 years of age and I was unable to pay his final expenses and had to declare bankruptcy. A simple $8/month policy would have averted telling my wife that we had to go with the cheapest possible funeral because I mistakenly believed the line that you’re insuring “income.” Not to mention the cost of the trauma care and other medical expenses. The bills. The unending phone calls from collectors who continually reminded my wife of her loss – every damn time the phone rang.
Everyone needs insurance. Everyone. You aren’t JUST insuring income. You’re insuring continuity of your own way of life. Continuity of your sanity.
That’s worth $8/month. No snake oil, just common sense. And no I don’t sell the stuff, I’m a truck driver.
I think I can speak for all the readers in expressing our sorrow at what happened to your son. I am also sorry that you received all those terrible calls. I can only imagine how terrible that was.
I’ve never seen the point or liked the thought of life insurance for children. At all. I believe it is highly unethical and parent’s shouldn’t be allowed to take such policies out on their kids.
Do you have a savings for your childs education? Better question, do you have children?
Neal, a very well written column and I agree with most of your points except for the main one.
First, a disclosure, although 99% of my work is as an investment advisor and author, I am a licensed insurance agent. Second, I haven’t sold a children’s policy, only because my average client is 72 and I carry the license to handle their needs for finding policies for their insurance trusts for estate planning.
Second, insurance, in my opinion, is not a valid alternative to traditional investments or savings. Period.
Third, parents should buy a participating whole life policy from a top-rated carrier for their kids. Why, as mentioned in a previous comment, to protect the child’s ability to buy insurance in the future. Children’s policies have a free, or low cost rider, to increase death benefit in future years without a physical. Children’s diseases like diabetes, leukemia, etc., are occurring much more regularly. These children will never, ever, be able to buy an individual policy. Cost of these policies is very low.
Fourth, a common misconception. There is almost no incentive for agents. Premiums are typically less than $300 per year. It would take a boatload of policies at a commission rate of 50-55% to make any money. That’s why most insurance agents don’t offer these unless asked and why they call them nuisance policies.
Fifth, commission rates on term insurance, which is the best choice for most people, are among the highest. Most carriers I’ve seen pay 90-110% of first years premium!
Finally, despite the above, I do agree with most of your points. I love your blog and follow it, although I just subscribed to the email feed today. Keep up the good work, but I’d ask you to reconsider insurance for children. I have family members who aren’t even ten yet who will never be able to buy individual insurance.
Paul, You –and many other folks who have left comments – make some compelling arguments.
I will re-think this issue. My premise is that you use life insurance to replace income. Your wise comment is that kids become adults and then they will have a need to replace their income. If they are uninsurable at that time, it would have been better had they purchased the coverage when they were young and healthy.
Your logic is clear and unassailable. I just don’t know what the odds of this happening are. As you say, it is a case by case situation.
While the commissions are low on this, I just don’t think most agents sell it for altruistic reasons. That of course doesn’t mean it’s a bad deal but I don’t think the insurance company or the agent is doing anybody any favors.
I suppose if you think the odds are high that your child will become unable to buy insurance down the line and that they w/die young, it makes sense. Again, I have no idea how often this happens.
But I really appreciate your well thought out comments. I will continue to ponder.
Neal,
One of your points about life insurance for children is still quite valid. There are those who recommend heavily overfunding a variable life policy to save for college, the child’s first downpayment on a home, or whatever. I think it’s safe to say we both agree, not a good recommendation.
Insurance has a purpose as the foundation of a financial plan, but the plethora of products make it sensible to get a second opinion from a CFP or CPA who is not involved in the commission. Insurance is not an alternative to traditional, or non-traditional, investing. Internal costs eat returns and, for those in higher brackets, all gain and income generated from variable annuities is treated as ordinary income for tax purposes. It’s also very difficult to write off losses.
Thanks for your thoughtful reply to my comment and the other comments on your blog and, best regards, Paul
Neal,
I almost never comment, but here’s why I am here.
Have you ever heard the terms never say never? You present this argument like it’s possible for one person to be 100% correct and all other thinkers are in error.
For example, if one candidate is much stronger than the other – think Obama vs McCain – what are the results 100% to 0%? No, a landslide is 55/45.
What about the car decision to lease or own taxwise…another 55/45 proposition in general.
Point being is obvious, there are two sides to most stories.
I’m worried about your strong – “snakeoil” – abuse of your column’s power.
Why?
Investment options for permanent insurance are super robust now and in fact are NOT limited, they are abundant…
Investment gains after a few years pay for the insurance portion and in some cases there are bonus’s on top of that.
The strength of tax free loans on withdrawl is unique at retirement…the investment remains, you remove $ via capitalized loan creates tax free retirement money without reducing the golden egg…
So I get the feeling you might be advising people to load up on RRSP’s (very good friend of the govt because of all the tax you pay at the end) others are structuring their money in tax free exit vehicles and THEY are “snakeoil”….??
Lastly, a cheap cheap term to put a “placeholder” for a renewable and convertible to permanent when child turns adult and wants to build tax free retirement is actually pretty sound.
Lastly, lastly, I empathize with the people who have had misfortune and tend to agree with the people that think the shock to the family in such a misfortune is larger than people think…and to have options at that point in your life instead of being painted in the corner is a nicer side of the fence.
Not cranky Neal, just don’t see the need to fake apendicitis….
Enjoy your posts generally…
Regards, Gerald
Gerald,
Thanks. You certainly make good comments. I tend to have strong opinions…you are right.
I can only share my experience and I have done so fairly. That being said, I also agree with much of what you said. There are cases where this would make sense. But addressing insurance for children as a whole, I am against it. If you have special circumstances (health or finance), go for it. But all things being equal, this is sold to the wrong people for the wrong reasons in my experience.
Gerald, I appreciate your thoughtful comment and of course appreciate your kind words.
Neal, I realize the purpose of a comments section on a blog is not for debate between your readers. But I am curious, so I hope you will allow a question for Gerald.
If so, Gerald, are you referring to Variable Universal Life Insurance, Whole Life Insurance, or something else in your comment?
Thanks, Paul
I have a 2 1/2 year old with a life expectancy of 5-7 years. I don’t want him burned to ash and shoved in an earn, not be able to have a viewing/memorial that my warrior so greatly desearves. Am I, a hard working parent with so little income I can’t maintain expenses let alone save for a funeral, to deny my flesh and blood a beautiful, respectful send off? This makes me a bad parent (as someone abouve implied)? The reality is that THOUSANDS of children die each day, and rates on child life insurance, and poor policy quality come from deseptive applicants, or tragic accidents. Insurance companies for out full poicy promise without making any profit.
I care about my childs future! I know that his will not have the same length and promises of most so instead of a college fund, I have a burial fund.
To the individual saying this is unethical, why? Why can’t I plan my childs funeral and buy a policy for said purpase, if you can plan or buy policies for college funds? Is a healthy child more deserving of having a plan for their future, no matter what the future holds, than my child!?
I am a caring loving parent. I have a $5,000 policy that I pay $318 annually for!!! I’m not seking a profit, only hope that I can give my son a deserving farewell.
I have a great policy, helped selected by my aunt who is a globe life insurance agent.
I have no reservations, regrets, or second thoughts about this policy.
Neal,
I respectfully disagree with you. I am an agent and come from a healthy family of long livers. With that said, my brother contracted cancer at the age of 21 and died from the effects of treatment by the age of 47. He was married AND uninsurable. My other brother started having seizures at the age of 14 and is now 43. His life insurance is rated and expensive. My list of examples outside the family is extensive.
Youth rates are inexpensive and whole life coverage can be paid up in either 10 or 20 years.Contractually paid up. Done. That fact coupled with an internal rate of return hovering at 5% in year 30 is not a bad investment (10 or 20 year paid up, using a 160 year old mutual company).
I agree that life insurance cash values should not be used for college funding or in lieu of a Roth IRA.
Thank you.
James Harkins
The problem with all discussions of life insurance is that rates can be so massively disparate as to be rediculous. It’s easy to say that you should not buy life insurance for a child if it costs a lot of money, but is there some point where it’s so cheap it is a good idea, if nothing more to pay for the costs of a funeral, which can be considerable?
I have life insurance through a professional organization for myself and my wife. Adding $10,000 coverage for all of my dependents costs $4.20 a YEAR! The small likelihood of ever having to pay mean the rates are very low, at least from those not seeking to massively profit off of your policy. And, it’s just an add-on to a larger group term life policy, so it’s very inexpensive.
I learned about life insurance the hard way. I had term life insurance from Northwestern Mutual many years ago. After a few years, I found coverage through IEEE (New York Life). I got six times as much coverage for less than half the annual cost! The same product with about a 16 to 1 difference in price? So, when you talk about coverage for children, be sure you look for a reasonable price, since many insurance products are an absolute ripoff.
OK, obviously you have never talked with a grieving Parent who has lost a child. Children die all over this country everyday due to unforeseen accidents and sickness. If you are a Parent, can you even imagine the heartache that is associated with this type of loss. A complete mental breakdown is not unheard of, being unable to return to work after the standard 7-10 day bereavement period is up is also a common occurrence, Final Arrangements need to be paid for….
For a family that is living paycheck to paycheck & maybe not the best, disciplined wise, at saving money in other traditional methods- Life Insurance is definitely a better option to not having a plan in place at all. Are there better savings venues than Life Insurance, no doubt & no arguments there but different strokes for different folks.
As an Insurance Professional, it irritates me to no end when I read blanket statements/posts like these. Life Insurance is not a one size fits all product or topic of discussion. Everyone’s economic status, comfort levels and lifestyles are not the same.
I mean no disrespect to you and your opinions Sir but please, don’t just dismiss it as a “Bad Idea” for everyone else in the world just because maybe, no one in your circle of influence needs it.
Respectfully agreeing to disagree.
Most of the people who have a big issue with this are insurance sales people. The emotional tragedy has nothing to do with the need for life insurance. The odds of having to go through something like this are thankfully very very low. Life insurance companies don’t push this because they are so concerned about grieving parents. This is sold just like guaranteed life insurance – it’s a rip off.
I couldn’t disagree more. Yes your kids doesn’t provide income but how long will you be out of work if your kid passes away. How much income will you need to replace???? Another important factor to look at is what if your kid is uninsurable at 20 or 30 when they have kids? Plan for the future we will all pass away one day what’s a better gift for u or your grandkids??