Do Your Children Need Insurance?

It is natural to think about protecting your kids.  You want them to be safe. You want them healthy and happy.

Is insurance something we need for our children? What types of insurance would be proper for my kids?

The answer like most answers in life is it depends. Let’s break down the possible types of insurance and when those products could be appropriate for particular situations.

Term Life Insurance Plans

As far as I know, there are no term plans available only for children, at least I couldn’t find any. You can get a rider for your (the parent) term policy to cover a smaller portion in the event of your child’s death. Typically parents opt for an amount of $20,000 or lower. The motivation is to cover funeral expenses. You can find a cost breakdown here of what various insurance companies charge for a term life insurance rider for your child. The cost seems to hover between $5 and $7 annually per $1000 of coverage. That means you would pay $50 a year for $10,000 in term coverage. You can purchase a rider for a child under 17 years old and keep it until she reaches 25 years old.

The reality is your expenses will ultimately go down since you are not supporting a child. Therefore, insurance isn’t necessary unless you think you will have trouble covering funeral costs. That shouldn’t be the case with most high-income earners with a good emergency fund.

Once your children reach their 20’s, they will be insurable for term life insurance on their own merit. They can buy their own policy, or you could get them started and buy the first year or more for them.  I’m healthy and I know I bought my first policy when I was married at 23 years of age. The monthly premium was around $30 per month for $1 million in coverage for a 10-year term.  Most term insurance is cheap compared to the alternatives.

Permanent Life Insurance Plans

I’ve heard of insurance salesmen promoting these products as great college savings plans, or setting your kids up for a great inheritance with the “investment potential” these products return.

Unless your child is making a large amount of money or has the potential to make a lot of money, I don’t see how this is a good investment. If your child is a movie star or professional athlete then this could make sense. Even then, if you have taught him sound financial principles and you are the custodian of his finances, the whole family could be self-insured with enough income and savings. Insuring against a potential professional career in athletics can be a good choice as well, such as buying a policy in case your star quarterback is injured.  These are pretty rare circumstances, though.

You’re going to be getting inferior returns from mixing insurance and investing. You’re also ultimately delaying your own retirement by placing an emphasis on insurance premiums instead of investing in your own accounts.

If this is sold to you as a great college savings plan, again, run away.  There are better value products to invest in for college than a life insurance policy.

Some will argue that you can borrow tax-free from the cash value of the insurance policy, but that is no different than borrowing money from anywhere else. It’s all tax-free.  You still have to pay it back with interest.

I guess it is better to pay yourself the interest, but the best plan is to save the money in the first place. Then pay for college from that account.  There is a lot more freedom with a 529 or taxable account in how you use the money and how much you contribute each month compared to a whole life policy.

Whole Life

Do Your Children Need Insurance?

                              Hole Life?

With the whole life policy, if you don’t pay the appropriate premiums, the policy can lapse and you have nothing. With a 529 or another investment account, you can make whatever contribution you want, when you want, within gift tax and 529 plan limits.

The two main types of permanent life insurance are whole and universal life. Whole life has a set premium each month.  If you miss a payment, there is a grace period, but after a certain amount of time, that policy is void and you can’t use any of the money that was paid into the policy. If your financial situation changes, and you can’t pay the premiums, all the funds that are placed in the policy are lost.

Universal Life

Do Your Children Need Insurance

                        Talkin’ about Universal?

Universal life allows you to change premiums and can provide more flexibility. You could skip payment as long as the cash value of the policy covers the expenses of that month.  Eventually, the cash value will be unable to cover expenses if you stop making premium payments and then that policy will be void as well.

As you can see, saving for college in a life insurance product comes with a lot of strings attached.

A lot of people will tout the advantages of life insurance for a child to help cover funeral expenses during a devastating time. As high-income earners, and if we are following the Baby Steps for HIP, you should have more than enough saved in your six-month emergency fund to cover funeral costs.

Another reason that people encourage life insurance for a child is to ensure against decreased insurability in the future. If your child develops a chronic illness and no company wants to touch him, then that could be a burden.

If you really have that concern, then you could defend the position to purchase life insurance. I got a couple quick online quotes for a $50,000 for a child born this year.  Here are the screen shots.

Mutual of Omaha

Protective Insurance Company

 
 
 
 

 
 

Compound Interest Really Works!

 
 
 
That just gives you an example of what the insurance company can collect in fees over time. 
 

Medical Insurance

This is a no brainer. You can look at my other post, Getting the Most Bang for Your Healthcare Buck, to get an idea of how much a new baby will cost you.

The bottom line is a major medical catastrophe with your child could bankrupt you just like it could if you, the parents had one. You need to have medical insurance on your child.

 

Automotive Insurance

Do Your children need insurance

                                   First Car?

This will be a biggie when your child becomes a teenager and he wants to drive. This is a good opportunity to discuss the responsibilities of driving and the costs associated with that privilege. The average cost of adding a teenage driver to your existing policy will likely be over $100 a month. 

I’m in the process of discussing insurance and the cost of vehicle ownership with my 15-year-old. Wish me luck.

 

How We Approach Insurance

Insurance isn’t a glamorous topic, but it is one we should think about. We should look at our savings and how we can self-insure. We should look at the areas it makes more sense to buy insurance products and the areas it doesn’t.

I don’t have life insurance policies on any of my kids. If the worst happened, we could absorb funeral costs and thankfully they are all healthy.  I would rather contribute to 529 plans to help with college and teach them the sound financial principle that will lead them on the path to financial independence.

I know some families are not as fortunate as we are and should look for security with life insurance . As a general rule for higher income earners, we should be able to self-insure against more problems if we are diligent savers.  That will save us the most money and promote wealth over the long run.  

What do you think about life insurance for your kids? What is your insurance plan? Let me know what you think in the comments.

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Tom
Tom is a doctor, husband and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

2 Responses to “Do Your Children Need Insurance?

  • Nice summary. We don’t have any insurance for our kids except adding them on to my health insurance.

    • We had our kids pretty young as compared to others in our field. It didn’t even enter our mind then. Especially since we were worse than broke.

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