I went to a trade show this past weekend for parents that are either expecting or recently had a newborn. More than one of the booths was pushing life insurance for your newborn. They were marketing it as cheap insurance that will help you save for your child’s future and protect their rates if they develop health problems later in life.
As with most of the posts in the Insurance You Can Do Without series, the biggest issue is that you have to look at what financial loss it is that you’re insuring against. In this case, you’re insurance against the death of a child. While this is an emotional decision, from a financial perspective what monetary loss will you suffer if something were to happen? There is the cost of the funeral, but otherwise your financial responsibilities would be reduced from not having to provide for that dependent. If the cost of the funeral is a concern, you would likely be better off by saving yourself the cost of premiums and adding that same amount into your emergency savings.
For the savings aspect of some of these universal life insurance products, you would be better off with term life insurance and saving the difference in premiums in a low-fee investment of your choice. That applies to anyone, not just children. However in this case, if you do decide that life insurance is unnecessary, you could save the entire equivalent amount of the premium within an RESP and accomplish much more in saving for your child’s future.
When it comes to protecting your child’s rates from future health issues, this would be a bit like gambling. To insure for this reason you would probably have some concern that your child will have problems in the future. The problem is, if you know of any family history then you have to tell the insurer and this will lead to higher premiums right from the start, and if you don’t tell them they could deny your claim.
As for the insurance being “cheap”, this is simply due to the unlikely event of a child dying compared to that of an older adult. The lower odds mean that the insurer is not taking on much risk, and therefor not increasing the premium.
Life insurance should be purchased to cover financial responsibilities such as remaining debts and providing for dependents. Since this doesn’t apply to children, this is insurance you can do without.
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It’s still comes down to personal choices, so of course it is marketed in an emotional way. But I like what you said about life insurance being cheap.
My dorky way of explaining it is that life insurance is cheap when both the policy owner and the life insurance company agree the risk is low. Life insurance when they agree the risk is high. If they ever disagree, you either don’t have a policy or you have a great deal.
My life insurance has a rider for a small amount for my son. I am comfortable with it, since it didn’t cost anything. Besides, at the time we were married for a year, with a newborn, and no money. I just figure having the rider is a good thing. But, of course, we prefer not to need it…
That seems to make sense, not sure why a child would need life insurance.
The only thing that would make sense here is a term product that protects their insurability in a meaningful way. Of course that is gambling – all insurance is. And from a financial perspective it is always *on average* a losing gamble. But that’s the point – you gain security by playing.
I wish that a term life product like this existed:
– Premiums start at birth, or preferably before, either as a rider on another life policy or as a stand-alone for people expecting children
– No benefit is in effect until the child a) gets married, b) gains a dependent, or c) reaches age 25 (for example)
– Term is to age 65, though it may make sense to have a diminishing benefit at age 50 or so
– Premiums and benefit both scale with actual inflation, because when you are planning so long-term there’s no good reason for either the company or the individual to leave that to guesswork
– Premiums scale with actuarial table changes, so if people start living longer the premiums will go down, and vice versa
The value proposition is entirely about getting into a large pool as soon as the world knows you exist, but before it could possibly know about your potential health problems. Bonus points for making this a multi-generational product that automatically covers any insured’s children, if they choose to begin making premium payments at birth.
Why doesn’t this exist? Because regulations forbid it. Most state regulations have been created, either by whole-life lobbying or by sheer political meddling, into demanding that policies over a certain potential term or that represent a certain amount of total premium payments must build a cash value. In other words, pure insurance products of the sort I suggest are currently illegal.
Ethan,
A cheap term life product would be an improvement. So far all I’ve had thrown at me have been policies that push a savings aspect. Unfortunately as savings vehicles, most of these are even worse than many of the high MER mutual funds I’ve ditched in the past.
I love my children but life insurance seems a little ridiculous for a young person.
This is clearly a very personal and delicate subject. It certainly confronts a parent with a rather dark idea that they would probably not like to face. The whole thing about insurance is that its about probabilities. So a parents attitude will be based on attitude to risk, and possibly even ‘rules of thumb’ (heuristics) a powerful one being the ‘availibility heuristic’ which goes along the lines that if I have heard or a child dying in my social set then I realise that it can happen and that being so ‘close to home’ I’d better prepare for the eventuality because I’ve seen it happen.
I disagree with this advice. Parents should purchase life insurance for their child as a gift to their child’s future spouse.
My parents did this for my brother and I. A few months later, my brother was diagnosed with Type 1 diabetes and would be insurable. So a good more there.
For me, my premiums are much less than what we pay for my husband (who did not have life insurance) when we took out a policy on him when we got married at 21 and 22.
My parents decision when I was 12 has paid huge dividends to us in terms of life insurance security as we get older. So maybe you won’t benefit from the life insurance payout as parents, but your child in-law(s) and grandchildren may.
You talk about the emotional aspect of loosing a child, does that have a financial affect? I would say it does. Do you think you loose a child and want to run back to work or do your normal things? It takes time. It can have a financial affect. Everyone is different and loosing a child is definitely as situation you can’t prepare for.
@Jen makes a great point about it being a future gift.
@Ethan Buy a $100,000 WL policy with a guaranteed insurability rider. This will allow you to purchase more insurance at the major life events such as you mentioned. The face amount will climb depending on how you fund it. You can cancel it and walk away at 65 if you choose and get money back.
Jen & Evolution of Wealth,
You make some good points about future premiums that I didn’t fully cover. It may still come back to what you do with the money saved by not paying the premiums. If it’s actually being saved, then you could have a somewhat-predictable amount saved by the time the child is an adult. This could outweigh any increased premiums that need to be paid.
It certainly depends on the situation that each person finds themselves in. If something where to happen to my child, having the payout would be very beneficial. I however prefer to focus on insuring against financial catastrophes that I couldn’t otherwise afford to cover, like my house burning down or something happening to me and my ability to pay the bills.
I also agree with Jen. If said child ends up with a health issue that finds them uninsureable, that one little policy may be all that they have for their entire life. As a gift for your child’s future family, I think it would make sense given it is a small amount.
For example, a young person diagnosed with cancer, who may already be married, with a young family but did not purchase insurance yet, or a young person who needed an organ transplant. Either would not qualify for life insurance, or it would be too high to justify. Even a small policy covering just a small payout would be something for the future family should anything ever happen. Heaven forbid, of course.
We’ll take out a small policy on our future child only for these reasons.
CanadianDebtGirl´s last blog ..Student Loan Debt in Ontario
I think @CanadianDebtGirl is right on the money. This post is what got me to write “Do You and Your Child a Favor” http://evolutionofwealth.com/2009/11/09/do-you-and-your-child-a-favor/
@Tom Thank you for the great topic and conversation. The problems with the savings policies you mention is probably not the policy but the person selling it to you. Permanent policies have a ton of funding flexibility. Most people don’t realize this and it’s the funding that gives the policy most of it’s performance.
Evolution Of Wealth´s last blog ..Guaranteed Not To Happen