Should I get Life Insurance for my Child?

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I’m in several Facebook groups dedicated to helping women with their personal finance goals. A lot of women ask really important questions, including about life insurance. I was asked directly “should I get life insurance for my child?” She explained that her kid has a high likelihood of being uninsurable as an adult. She was worried about their future insurability. She had heard that getting them a whole life insurance policy now would give them the “opportunity” to be insured later.

I think this is one of the biggest scare tactics insurance salesmen use; that well meaning parents help their (sickly) children out by insuring them against un-insurability in the future, just in case.

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The sales pitch

Here are some other sales pitches I’ve heard on why you should get a whole life insurance policy for your child:

  • The stock market was too volatile to put precious college savings into – you could lose it all! Insurance companies ease out the volatility and provide you predictable returns. Something you can count on
  • It’s a good idea to insure a child because funerals are expensive. If your child does pass wouldn’t it be nice to have the money to take care of those expenses and not worry?
  • It’s devastating when a child dies. You need to insure your child so that you can take time off work to heal.

It makes me angry to hear these things because this sales pitch preys on parent’s fears and hopes. Dear readers, DO NOT GET A WHOLE LIFE INSURANCE POLICY FOR YOUR KID(s)!! Below are four reasons to skip insuring your child’s life and what you should do instead.

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#1 Its very unlikely your child will die.

Well first off, it’s very very unlikely your child will die. Kids, especially those who live in developed countries like the United States of America, have a very low mortality rate. The Centers for Disease Control (CDC) show a mortality rate of 23 per 100,000 for ages 1 – 4 years old. For kids between 5 – 14 years old, it’s about 14 per 100,000. It is very very unlikely a child in the United States of America will pass away.

A healthy commission for the insurance salesman and big profits for the insurance company are the only guarantees with whole life insurance. Insurance companies know that it is highly highly unlikely a child will die. This is especially true of a child in a family conscientious enough to even think of getting a policy. Whole life and permanent life insurance policies for insurance companies are extremely profitable.

Want to take a guess at what’s probably more likely for your child?

It’s very likely that your child will need to go to the emergency room as a kid. Especially if you’re a new anxious parent. Baby Moneyaire has gone to the emergency room about 3 times in 2 years. Once we had to go and ended up staying a week to treat a kidney infection. Then, she got a tiny piece of debris in her eye. I couldn’t figure out how to get it out. Another time, she had COVID and I worried about dehydration. She was not but she did enjoy the emergency room popsicles.

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HSAs

Want to know what’s better than a whole life insurance policy on a child? A fully funded Health Savings Account. In addition to that make sure you have appropriate health insurance. If you don’t have an HSA, put money away into an emergency fund to cover unexpected costs. Its more likely that your child will get injured or sick than will die. Medical bills are not cheap. Our 30 minute emergency room visit to fish a tiny thing out of Baby Moneyaire’s eye cost us over $800. That’s after insurance paid their portion.

529s

What’s also more likely for your child is that they’ll need money for higher education. The cost of college has gone up nearly 180% since 2000. Paying an expensive premium for a whole life insurance policy will not cut it for college. Make sure you’re putting some money away for college or trade school by investing it in a tax favored account like a 529 plan. You don’t want to be caught flat footed when its time for your child to go on to higher ed. Here is an article I wrote about how to open up a Bright Start 529 plan. I like this plan because of its low fees and how straightforward it is to use. If you’re unsure about a 529 plan, here are the 15 most common questions I get and my answers.

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#2 Kids don’t have dependents

Second, kids don’t have any financial responsibilities. They do not have financial obligations that they need to shield their dependents from BECAUSE THEY DON’T HAVE ANY ONE DEPENDING ON THEM. The only way I would even consider insuring a child is if they are a movie star and make a lot of money. But, even so, I’d be side eyeing you; what kind of parent mooches off their kids?! The main reason to have life insurance is to protect surviving loved ones from financial ruin when the person they depend on passes away.

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Now, you may hear the pitch that if your child passes away you’d be too devasted to work and that funerals can run over $10k. True on the devastation. If Baby Moneyaire passed away I wouldn’t be able to get out of bed, let alone go to work. I’d want to take time to heal. Funerals can be expensive. However, most whole life insurance policies for children have pretty low death benefits – they’re usually $100k or less. Most are $50k or less. The insurance would probably cover a funeral and burial costs and allow you some time off of work to grieve.

But the odds of your child passing in childhood are low. The costs of a whole life insurance policy are high. Remember it’s over 99.9% likely your child survives to adulthood. Instead of buying a whole life policy on a child, work towards building up your emergency fund. Use your emergency fund as a way to self insure against catastrophe.

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#3 Guaranteed insurability; there are no guarantees

Perhaps, we should put the focus on raising our kids so that when they’re adults and have children of their own, they can figure out how to insure themselves? Maybe, just maybe?

If your child had a serious childhood illness like cancer, I still wouldn’t recommend getting a whole life insurance policy. First, the odds are they’ll survive. About 80% of pediatric cancer patients in the US are cancer free after 5 years. After five years of being cancer free, your adult child will probably be able to get term life insurance. If you’re really concerned about their future insurability, invest in a cheap index fund that tracks the stock market. If you do this for decades, you’ll have built a rainy day fund for them.

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Not enough

The death benefit amount of an expensive $50k whole life insurance policy won’t be a meaningful amount of coverage. Once they have dependents of their own they’ll need upwards of $500k to $2 million as a death benefit. Here’s the kicker; they’ll get that amount of life insurance as a term plan for about the same amount the tiny whole life policy was costing.

There’s no guarantee, really

The thing about the guaranteed insurability argument is that it assumes you’ll make every single required premium payment for years AND THEN that your kid will. If you don’t, then your whole life insurance policy is guaranteed to lapse. How likely is it that a job loss or something else financially catastrophic (or just plain forgetting) will happen and those premium payments will go unpaid? Probably much more likely than the thing you’re trying to insure against.

#4 The cash de-value

My parents bought my whole life insurance policy because they were sold on it being a great way to save for college. This was a lie.

When I turned 18 I had the option of continuing my whole life policy or closing it. I needed the money that was in the cash value portion of the policy. My parents had dutifully paid the premiums for this policy since I was a baby. At the time, my family was tight on money. My dad’s hours were cut. I had impending college tuition payments. We didn’t have the money to continue the policy. We couldn’t take a loan on the policy because there wasn’t enough built up cash value. The best and seemingly only option was to cash it out and pay surrender charges. Doh! That’s right, I had to pay a hefty fee to the insurance company just to get at the cash sitting in that account. It was one of the most aggravating things ever. My parents felt swindled, because they were.

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My family would have been better off had we just saved the premium money in a savings account. Want to do even better than that? Check out the chart below. It shows how money grows over time. By saving $50 a month and investing it at about a 7% return for 18 years you come out with ~$20k. Certainly better than the small amount of money I ended up with.

Birth to 18 is a long runway of time. If you invest $50 a month for 18 years (total investment of $10,800) and earn a 7% return a year, you’ll have just over $20k. That’s a pretty healthy starter fund for an 18 year old. Much better than a whole life insurance policy they’ll be stuck with.

The cash value carrot

The cash value of these accounts are the carrot held in front of hopeful parents. However, only a tiny portion of your premium goes towards the cash value of the policy. If you’re paying $25 a month, maybe $5 will go towards the cash value. Maybe a little more, maybe a little less. But that’s AFTER the commissions are paid out to the agent who sold you the policy. Practically no cash value is created in whole life insurance policies in the first three years. This is because all or part of the premium goes to pay the person who sold the policy a fat commission. Yuck.

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Review the chart above – you’re better off investing than trying to grow your money in a whole life policy. After commissions, fees and whatever else is paid, the tiny amount of your premium that goes towards the cash value might earn about 2 to 3%. That’s terrible. Also, don’t forget there’s a surrender charge period that lasts from 10 to 15 years on these policies. A surrender charge is a fee the insurance company charges for the privilege of accessing your own money.

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If you want to take a loan on the cash value, you’ll pay an interest rate on the payments. When you fail to make those payments, the policy can lapse. Then you’ll have to pay taxes on the loan amount. So much for whole life insurance policies being a clever tax shelter!

Add on a Child Rider to your Term Policy instead

Still convinced that your child needs life insurance? Then look into adding a child rider on your existing life insurance policy. If you don’t already have a term life insurance policy on yourself, please stop here and read this article. Before you contemplate life insurance for a child, be insured yourself and with the proper amount of insurance.

A child rider will provide a small death benefit if any one of your children did pass. That’s right, a single child rider can cover multiple biological, adopted or step children. This is much cheaper than a whole life insurance policy on each child and provides many of the same benefits.

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Child rider benefits

First, a child rider will pay out a death benefit in case the unthinkable occurs. Second, these riders can also help guarantee insurability when your child is older. The insurance company may allow you to convert the rider to a permanent life insurance policy. The best part is that they are relatively cheap. These riders will run you about $5 to $7 per every $1,000 of death benefit. For example, if you’re hoping to get a rider for a $25k death benefit, you’ll pay about $150 to $175 a year in addition to the term premium you’re already paying.

We don’t have a child rider on our term policies. Instead, we fund a 529 plan for Baby Moneyaire. We know that to really help our kid out, investing for her future is the best bet. If you really want to help your kid out, open a 529 plan for them. They’ll still be able to use the money if they decide to go to trade school or no school at all. Yes, they’ll have to pay taxes and a penalty, but only on the earnings. If your child becomes disabled, the 529 plan can be converted to an ABLE account. An ABLE or “Achieving a Better Life Experience” account can be used to pay for disability related expenses for the designated beneficiary. This can be for education, housing, transportation, etc.

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Never heard of a child rider?

It’s because it doesn’t make insurance agents a lot of money. It’s much more profitable for an insurance salesman to sell you a permanent policy for a child. If your agent has explained child riders to you, and has advised against a whole or other permanent life insurance policy, you have a pretty decent agent. Otherwise, I suggest you cut ties with your insurance agent. You’re going to be better off without them.

Should I get a life insurance policy for my child?

No. A whole life insurance policy is definitely not a financial product you need or even want as part of your family’s financial portfolio.

  • First, kids are not likely to pass in childhood.
  • Second, they don’t have dependents who rely on them financially. Life insurance is meant to protect loved ones from financial ruin if a breadwinner passes. Focus on saving for healthcare emergencies, higher education and just in general, instead.
  • Third, there are no guarantees for future insurability. Further, a small policy bought for a child won’t be enough for a future adult with a family.
  • Fourth, cash values aren’t going to grow as fast as saving and investing in the stock market, especially through a tax advantaged account like a 529 plan. And it’s true; the stock market can be really volatile. It goes way up and way down. There are a lot of scary stories out there. Over time, the trend is up. Invest in low cost mutual funds or exchange traded funds that track the whole stock market.

Cheers!

Mrs. Moneyaire