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Life insurance for children. Does it make sense to buy it?

I have three children.  My wife and I are high school sweethearts.  We love and care for our kids more than anything and always want what's best for them.  They are growing up in Grand Rapids and we feel blessed to be able to raise them in such a wonderful city.  As a financial advisor in Grand Rapids, I’m often asked questions regarding purchasing insurance for children.  It's a good decision, correct?  Not so fast...  Some clients have been approached by their insurance agent and persuaded to buy a permanent policy on their kids.  Your kids are precious and the most important things in your lives.  These compelling conversations pull on your heart strings and really entice you to pull the trigger.  However, before spending money buying insurance on your children, please consider the following:

1.    Permanent insurance is very expensive.  

When you decide to purchase a whole life insurance policy, the first several years are costly.  Most of your premiums go towards commissions, the cost of insurance and administrative costs.  It can take decades to break even on your premiums.  Before you make the decision to buy the insurance, understand how the policy works and the costs associated with buying permanent insurance.

2.    Life insurance is typically purchased to replace income and debts.  

Your children have zero income; there’s nothing to replace.  Furthermore, I could argue that my expenses would dramatically decrease if I lost a child.  Children are expensive!  Yes, there’s the cost of a funeral.  Your agent likely brought this to your attention and talked about the total expense being $10-15k.  I’m not trying to be harsh, but if you can’t pay this expense out of pocket or from your savings, you probably have larger financial issues that need to be addressed before even thinking about purchasing insurance on your children. 

3.    “I am concerned about my child qualifying for insurance in the future. "

If I purchase it now, my child will be able to qualify for 10 times the amount I purchased without going through underwriting.”  Let’s first revisit the amount of insurance you’re planning on buying.  10-15k.  If your child is uninsurable in the future and has the opportunity to buy 10 times this amount (100k to 150k), do you really think this would cover family needs in 30, 40, or 50 years?  With inflation, your child will more than likely need a minimum of 750k in life insurance.  Even more likely, the child (now an adult) will need somewhere between 750k and 3 million in insurance coverage.  Maybe more.  The small whole life policy you are thinking about buying isn’t going to make a dent in the total need.

4.   "It means you are smart enough to put that money to better use – like saving for a college education.”

 An article from US news sums it up perfectly.  “In general, life insurance for kids is a huge waste of money. That’s because (thankfully) most children are born healthy and live a very long time. And since children don’t have any income, you don’t really have any reason to insure their lives, as cold as that may seem. Just because you don’t buy insurance doesn’t mean you don’t love your children. It means you are smart enough to put that money to better use – like saving for a college education.”

About the Author:

Michael Steinebach is a Financial Advisor serving the Greater Grand Rapids area.  Born and raised in Rockford, Michigan, Michael is a focused on helping individuals in the community make prudent choices with their money.