Life Insurance on Children

What type of life insurance do people buy on children?

Whole Life “savings plan” life insurance: Thanks to companies like Gerber and well-meaning grandmothers, there is a sense among some parents that children can be served later in life by purchasing a cash-accruing whole life insurance policy on them as babies. These plans are often $25,000 or less in death benefit and can cost as little as $10 in monthly premium, sounds great right? The reality is life insurance is not a investment, it is a risk mitigation plan. The cost to pay for the risk mitigation is foremost in how premium is allocated towards your policy. For every $10 dollar premium payment, roughly $5-7 of those dollars are paying for the cost of the death benefit. This leaves around a third of that money to go into a cash account, so about $36 dollars annually. Now one may say, what about the interest on that cash value, isn’t that what makes a whole life insurance plan so beneficial? The plans most commonly marketed as specially designed for children are traditional fixed whole life policies. These are policies that apply only a fixed interest to your cash value, generally 2%-3%. These are not the same types of plans often referenced in “infinite banking” or “back door Roth” schemes, which offer a indexed rate between 0 and 15%. Suffice to say that even after 20 years of faithful payments, $36 annually compounded with 2% interest barely breaks a couple thousands dollars in cash value.

Child Term Riders: Now Bay Life Brokerage will set up someone with whatever coverage they think is best for them and their family. If however, we are asked for a recommendation for child coverage, we normally point our clients in this direction. CTR’s are attachments of temporary coverage for children of a primary insured who is covered under a much larger policy. These plans do not accrue any cash value and they are temporary, but so are children. When the child reaches past their 25th birthday this coverage automatically ends. CTR’s are a only a few dollars extra a year in premium. They satisfy the primary concern when considering life insurance, the coverage on the child, and not a false sense of building a nest egg.

Do Children need life insurance?

If the general tone of this article has yet to give it away, we are not the biggest promoters of purchasing life insurance on children. The core purpose of such a product is protect one from financial risk. Children do not normally generate household income, hold assets, or pay portions of household expenses. The financial risk of losing a child normally amounts to nothing more than the costs of their final arrangements. The actual risk of a child being lost even if this type of relationship did exist is negligibly low. Child mortality in the U.S. sits around .005%. So in our calculation, money is far less efficient if funneled towards a policy on a child than if it was put towards more coverage on the parents, or even into a normal savings vehicle.