Money Obedience

Life insurance for a child is a big, fat waste of money. Here is why I think so and why you might want to save the premium when you are setting up a budget.

I’ve had life insurance agents suggest to me that I should buy life insurance for my children. I always dismissed that offer quickly. In my mind there is absolutely no need for such an insurance policy. To be honest, I never thought that life insurance for children was really a product that insurance companies pushed that hard and people bought so often. I guess I believed that an insurance company would not shove these policies down people’s throats if there is no benefit to the customer. Boy, I was wrong. Like most companies, insurance companies are motivated by profit. And child life insurance must be great business for the insurance companies, since insurance companies seem to spend a lot of money advertising these policies. (If you don’t believe me, check out recent issues of parents’ magazines!) During my recent visit to Florida my sister-in-law told me that at her insurance agency the most successful sales people sell, for the most part, child life insurance policies and universal life insurance policies. Neither of these policies are ones I’d recommend! But – surprise, surprise – both types of policies offer the insurance agent high commissions.

Outside of the commission that insurance agents get, why is child life insurance such a waste of money? Let’s look at this problem purely from a financial point of view. The main purpose of life insurance is to replace lost income on which others rely when a death or disability occurs in the family. Most children in well-off countries like ours don’t work for a living! In fact, as every American parent knows, having a child costs a lot of money. To put it crassly – and I’m sorry to do this, but it’s only to make the financial point – the death of a child is a net financial gain because the parents will no longer have to provide for the child. Even taking burial costs into consideration, as well as the money parents save by not having to provide for the child any longer, the death of a child is a financial gain. So, when parents buy a life insurance on a child, they are buying insurance “against” a financial gain, not a loss. That’s the opposite of what any insurance should do.

So, what’s up with universal life insurance? Fast talking insurance agents say that a whole life or universal life insurance policy for a child is a really great idea because part of the higher premiums will be allocated to a savings account, and the “cash value” of the account grows and comes with tax benefits. But the fact is that the largest part of the first premium and a very large part of every other premium goes into the pockets of the insurance agent in the form of commissions. These policies benefit the savings account of the insurance agent far more than they help the savings account of the child. Worse yet, the return on the little money that is accrued is usually significantly lower than the amount someone can get if they use the same money to open a regular savings account. Said another way, the savings account pays far more in dividends than would universal life insurance for a child.

Okay, so why do so many people buy these policies? Well, I can’t say for sure. But I suspect two reasons. One, fast talking insurance agents make you believe that these policies are good and perhaps even necessary. Two, parents look at their children with love and not with a calculator, and since they value their children emotionally, they believe that love translates into financial investment. But, truth be told, the emotional connection with a child does not mean that the purchase of life insurance on that child makes financially sense.

Bottom line: if you are thinking about getting a life insurance policy on your child, I suggest you just say “no”. If you already have one, I suggest you cancel it. Put the premium you are not paying to the insurance company into a high yielding savings account. Either way, over time, you will have saved a nice chunk of money.