When I was in college, a co-worker told me a story about a friend whose baby died just a few months after being born. Not only did the loss devastate him and his wife, but it set them back financially.
They were still trying to cope with medical bills from when their son was born, and now they had to deal with a funeral and other expenses.
It might sound counterintuitive to buy life insurance coverage for your child. After all, they don’t earn an income, and the chances of a child dying in the U.S. have decreased significantly over the past few decades, according to data from the Centers for Disease Control and Prevention compiled by the United Health Foundation.
That said, here are three reasons my wife and I decided to insure our kids and three caveats to consider before doing the same with yours.
1. It gives us options
I bought enough life insurance coverage for our kids to cover funeral expenses — which can range from $7,000 to $10,000 on average, according to Parting — and to afford to stop working for at least a few months to be with my family.
I can’t imagine losing a child and having to return to work the next week because I have bills to pay. Having insurance coverage gives us flexibility and peace of mind.
Caveat: It’s wise to avoid insuring something you can self-insure through income and savings. When we purchased the life insurance policies on our kids, we didn’t have the cash flow necessary to pay for a burial, let alone anything beyond that.
As our financial situation improves and we have enough cash in the bank to self-insure, we might get rid of the policies.
2. It supplements their college savings
While our main reason for getting coverage on our kids was for the flexibility, it also gave us an opportunity to save for future education costs.
“You can’t buy term life insurance for minors,” said Shauna Visconti, sales director at Leap Life, a California-based insurance agency. “If you want to buy a policy for your child, you’ll have to buy a permanent insurance policy like universal life or whole life.”
We bought whole life policies, which include a cash-value component. Over time, a portion of our monthly premiums builds up in a cash-value account. By the time our kids are ready for college, we’ll have a few thousand dollars in cash value we can use to help them pay for it.
We can do this through a loan from the policy or by canceling the policy and taking the full cash-value amount.
Caveat: Whole life insurance offers a guaranteed return of just 1.5%, according to Consumer Reports. In contrast, you could put your money in a savings account or invest it in the market through a 529 college savings plan and potentially get a much better return.
For example, we also opened a 529 for our son when he was born in 2015, and the account has returned an average of more than 10% a year since then. That’s tax-free growth as long as we use the funds for qualified education expenses. If your primary goal for getting whole life insurance for your child is to save for college, it shouldn’t be.
3. It guarantees their insurability
When we bought our kids’ life insurance policies, we included a rider that allows them to purchase additional coverage as they get older — up to $250,000 total — without needing to prove they’re still insurable.
“If they have a health concern that arises when they’re 10, 15, 20, or whatever age, that [coverage] can’t be taken from them — they’ll still have that policy,” said Visconti.
Caveat: If push comes to shove, you generally can find a life insurance company that offers policies with no questions asked. If your child does develop a health condition or disease that threatens their insurability, their options will be limited but not completely gone.
Also, whole life insurance can be relatively expensive, even for a healthy newborn. If you want coverage for your child but don’t care about the lifetime coverage, get a term life insurance policy for yourself and ask if you can add a child rider to it.
Child riders typically offer enough to cover funeral expenses and cost just a few dollars a month rather than $20 or more.
When it comes to life insurance, put your family first
As you can see, buying life insurance for your children isn’t a no-brainer.
While we felt it was a wise choice when our kids were born, the drawbacks are enough to make many people pass on it. And as our financial health improves and we can self-insure, it might not make sense to hold on to the policies.
The important thing to understand is that every situation is unique. If someone tells you a financial product is a good or bad idea in every case, it’s worth taking the time to determine if they’re right. If you receive offers for life insurance on your kids, research your options and review your budget before making a decision. Most importantly, don’t just go with the first offer you get in the mail.
Remember, there’s no right or wrong decision. What matters most is that you put your family’s needs first.
“You need to work with someone who doesn’t represent just one company,” said Visconti. If you’re talking to someone who sells insurance only from the company for which they work, they’re offering just their flavor.
Visconti recommends working with a broker who can help you compare options from several insurers so you have a better chance of finding the best rates that fit your budget.
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