Should You Buy Life Insurance for Kids?

No other blog entry I've written has received as many comments as my recent blog on life insurance for children. So many people disagreed with me (that life insurance for kids was a rip-off and that you should save for their education instead) that I went to find out if I was really barking up the wrong tree.

Seems that some experts agree with me; some agree with those who thought there were many good reasons to buy life insurance. Apparently, the final verdict is still up in the air.

Here are the various arguments, both pro and con:
1. It's a great, low cost way to both save money for your child, and ensure that insurance (at least some minimal level) will never be a problem.
2. It's a completely outdated product! You should take advantage of other savings vehicles, like RESP (in Canada) or 529 plans (in the US).
3. What the heck do you buy insurance for kids for? The purpose of insurance is to replace income, and so it makes no sense to buy life insurance for a child who isn't making any money.

Now, that's what the "financial experts" say.

However, the bottom line is that consumers are voting with their dollars. Life insurance for kids is not a popular purchase. The rate of purchase of this insurance has remained steadily at 15 percent of consumers for the past decade. The size of policy purchased is really quite small, generally in the range of $5,000. So, most people are purchasing this policy to cover burial costs -- and not necessarily to ensure future insurability.

Future insurability is something to think about if your family has a history of serious disease, like diabetes or heart disease. Here's the rub: if you are going to buy your child insurance for this reason, buy lots! Use your own income as a guideline, and consider inflation and other issues. Also, get a policy that is renewable by the child, whether you buy term life or whole life.

What are the chances that your child will be uninsurable when they reach adulthood? It's incredibly tiny. You have to consider your own family health history, and your own tolerance for risk for your child.

All the experts say don't just buy life insurance. Make sure that you also have other money set aside for your kids and their future. Most whole life policies (the only kind that accrue value) are not the best savings vehicles, so if you depend on this, you could be wasting your money.

Still, we don't have life insurance on our children. We do have savings accounts for their future education. We also have investments that will become theirs if anything happens to us. That's our strategy.

Posted by on October 12,2006 at 6:53 AM
I think this is exactly what we have to weigh out: the cost of the insurance versus our ability to handle a crisis if it occurs. If you are a single mother, you don't have the money to pay for a funeral. However, getting insurance also means finding the money in the budget to pay for an insurance policy. Do you assume that your child will live a long and healthy life (which the overwhelming majority do) or do you buy life insurance in order to pay for a funeral or ensure their future insurability? I'm still voting that I'm more likely to need money for college. However, I also know that our family is well enough off to pay for a funeral should that horrible occurrence ever take place.
Posted by Mark on October 11,2006 at 11:22 AM
I have a cousin who took out a life insurance policy on her children, but only after a friend of hers lost a daughter to a sudden and fatal disease. The impetus behind doing so was seeing her friend (who was a single mom) struggle so much financially with the funeral costs. Let's face it: burying your child is something no parent ever wants to face, so it's almost never on their financial radar. But realistically, saving for your children's education does make more sense. After all, what are the odds your children will die before they're old enough to get their own life insurance, versus what are the odds they'll want to go to college?
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