When I was a life insurance agent, I found this to be a touchy topic. For whatever reason, most parents could not see past the idea that placing life insurance on their child meant that they would be profiting off the child’s death. I am going to be bold on this page because this mindset will cause more problems than it solves, and I want you to be as informed as possible while you have the ability to make a change.
While I can see and appreciate the face value of this excuse, I believe it is profoundly narrow-minded. The reason is two-fold. One, have you not considered the potential financial burden that would be placed on young parents if they lost a child? The funeral is only one expense, and that alone is to the tune of $5,000-$20,000. Grieving parents tend to spend WAY more on a funeral than they would for an elderly parent. Tombstones for children are commonly the most expensive markers in a cemetery. You could also have steep hospital/medical bills coming your way. You might have lost wages and/or job performance due to grief, especially if you work in commissioned sales. You may have attorney fees depending on your situation. The need for attorneys will vary, but it is not uncommon for parents to divorce within a year of losing a child. On top of all the emotional stress that parents would experience in this scenario, do you want to risk having finances, or the lack finances, add to the stress? This part of it can easily be avoided, leaving the parents to be able to deal with the emotional aspect of it all. No parent wants this circumstance to happen, but why not check off the financial box ahead of time in case it happens to you?
I used to work in the funeral business, and I can tell you that it is nothing for a parent to spend $50,000 related to the death of a child. I’ve seen tombstones by themselves cost over $50,000. The parents are grieving, and spending more money than they ever would have in a more settled mindset. If that sounds insane, consider the reasons above I just laid out for you.
So, if you are convinced it’s a good idea, what kind of life insurance should you buy? If you have a job that offers life insurance as a benefit, there is likely an option to add a $5,000 or $10,000 child policy rider to your work policy for pennies on the dollar. This is a no-brainer if it’s an option. Take it. It costs almost nothing to do, and every bit helps. However, I wouldn’t stop there.
I would consider a life insurance policy outside of your job as your primary go-to. If you have your own policy, there may be a child rider option on that one as well. These options are term insurance options. That isn’t the best way to go for a child policy, but it’s better than nothing. I would consider a permanent policy for your child that’s completely separate from your own.
Here are the major reasons to consider permanent buying life insurance for your child:
1) Lock in insurability
This is probably the most important reason why every parent should consider this. Locking in insurability means that your child either already has coverage in place or can add additional coverage at a later date, regardless of health or occupation. This is extremely important because who knows what will happen with your child in the future? Think about your family history and if there are any chronic illnesses present. What if your child gets in some type of major accident and it renders him/her unable to function daily without assistance? This one hits close to home in my own life because there are several people with diabetes in our bloodline. It brings me great comfort knowing that I’ve guaranteed all my children the ability to purchase more life insurance later in life when they grow up and have families of their own. Hypothetically, they could be terminally ill and if the special date comes up for them to be eligible for more coverage, they could buy it and help their own families with greater financial coverage.
The other side of this coin is occupation. There are some occupations that are frowned upon from a life insurance perspective. These include being in the sky or ocean continuously; being a missionary in a dangerous location; being a police officer or firefighter, etc. I can’t list them all, but you get the idea. There are even hobbies that are frowned upon, like riding motorcycles or skydiving. Even being a regular traveler in airplanes can get someone rated as a higher risk or ineligible for coverage.
Here's the point: there can be numerous reasons why your child would not be eligible for life insurance later in life. Instead of having your child, as an adult, trying yet again to apply for insurance, only to be declined, why not set them up with the guaranteed option? This option can vary from carrier to carrier, but the basic idea is the same: insure the child now and gain a contractual guarantee for additional purchases later in life. Then, if your child DOES have a chronic illness or dangerous occupation, how much more will they appreciate what YOU have done when they have young children of their own and can buy more life insurance every few years? How much is that foresight and peace of mind worth? You might say, “What if I put this in place and my child is perfectly healthy and works a safe job?” To that I say, “Congratulations!” If you didn’t have to utilize this particular feature, that’s better for everyone anyway. Your child is healthy and that’s always good news.
2) Cash value accumulation
This is a major selling point from the insurance companies that sell child policies, but I’m going to apply the brakes here a little bit. Yes, there is cash value accumulation and, yes, it’s a good thing. However, I believe companies tend to exaggerate how much there will be. If you buy a policy on a 1 year old that has a face value of $100,000 or less, then you probably won’t have more than $10,000 of cash value in it by the time they are college age, and that’s a high estimate. Realistically, you’re looking at $3,000-$7,000 on average by the time they reach age 18. One thing that’s great about the cash value is the parents can use it for whatever they want. There’s no interrogator grilling you whenever you want to pull cash out. It can help with school, vacation, medical bills, etc. I wouldn’t count on the cash value to fully fund college, however. It can help supplement, but it shouldn’t be your primary means of paying. If you ARE using cash value to fund college, it’s better to use the parent’s policy, since the premiums will be higher and therefore the cash value accumulation will be greater.
Cash value does not count as an asset against your net worth if you are filling out a student loan application. I wanted to put that one in bold because it’s important.
3) Future gift
If your child reaches a maturity level that you are comfortable with and decide to gift the policy over to them, it’s so simple! What a great gift to hand off to a child one day. They can either continue to pay it, borrow from it, or cash it in and help start their own life. Lots of options are available. I made the mistake of telling my own children that I have cash value on policies for them, and they regularly ask me how much is in it and when they get it. In reality, I look forward to turning it over to them one day. If I am blessed enough to have the opportunity to do that, that’s a great thing! I hope to NEVER need to use their policies. If I don’t, that’s an absolute win for me. If I do, then I've made a great decision ahead of time that takes the stress of finances away from the grief. Either way, it’s a good decision for a parent.
Long form video
“So do I, and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.”