You will only make so much money in this world. Don't break the bank on financial products you don't need.
Ever write a post that strikes the wrong chord with commenters? I’ve been featured on Yahoo Finance almost weekly for the last few months. It’s been great for traffic and page rank. Plus, who could complain about writing for such a large audience. However, it’s not all beer and pizza. Sometimes, it means being eviscerated in the comments section.
My latest article, on insurance you don’t need, has elicited a record number of dissenting comments; particularly on buying life insurance for children. It would be easy to dismiss such commenters as likely insurance agents and I’d probably be right, but the points being made in favor of purchasing insurance for children is worth a more in depth discussion. You might have an insurance salesman sitting in your living room, it’s important to understand why certain policies are likely to be bad purchases.
Never Pay to Protect Hypothetical People!
I’ll start with the most convincing argument for purchasing life insurance for children; to protect insurability. What if your child becomes ill before buying life insurance? Sickness and certain disabilities could mean denied life insurance coverage later in life. While there isn’t much benefit for life insurance as a child, life insurance can be critical as an adult. Proponents argue that it makes perfect sense to buy insurance for your child to ensure that they won’t get locked out of life insurance before they need it.
I probably would have minimized the amount of scathing comments if I’d simply narrowed my article to term life insurance for children. However, I would have been taking the easy road instead of the right road. Buying life insurance to protect insurability is sillier than buying term life to cover funeral costs.
Why would I make such a strong argument? Especially in light of all the wisdom of the comments section? It’s a matter of who is being insured and who benefits from that insurance.
If you were to buy a life insurance policy to protect a child’s insurability, you might ensure that your child finds coverage as an adult. However, the benefits of income protection that are inherent with purchasing the insurance would presumably go to a future spouse or grandchild. While I do think that there is great value in term life insurance for adults, in the grand scheme of spending money on a large world of financial products, it seems like an awful waste of money to buy insurance for the protection of hypothetical people.
If It’s Not Needed It’s Not Cheap
The other big point that I am seeing in response to my article is that life insurance for children is cheap. In fact, for “like 12 dollars a month” you too can protect hypothetical children-in-law and grandchildren.
Of course it only sounds cheap. It may cost $12 per child, but it grows quickly the more children you have. Three children means $36 per month and over $400 a year in payments. That’s about the cost of my homeowner’s policy and nearly as much as my wife and I pay for our term life policies.
Besides, when did cheap justify an expense? I don’t have basic cable at my house. It is very cheap; $12 in fact. However, it would be a waste of money because I don’t watch cable. Texting costs $5 a month, but I don’t really have need of avid texting. Why would I buy it just because it’s cheap?
Protecting Hypothetical People is Overpriced
Perhaps buying life insurance to protect insurability would give you some piece of mind, it may even be cheap, but it is definitely overpriced. If your sole reason for purchasing life insurance for your child is to protect insurability, what you really want is an option to buy insurance at a later date. The frills of a death benefit and savings are completely unnecessary and only raise the cost of what you really want to purchase.
A Blanket Statement that I Don’t Mind Making
Finance is usually not a “one-size-fits-all” form of decision making. For me to tell the world that a life insurance policy for children is a waste of money is a bold statement, but one I don’t mind making. That’s because in the vast world of financial concerns, protecting hypothetical people should be at the bottom of your list.
Want to help your child? Here are some things that would be better uses of $12 a month per child:
- Two in three children attend college at some point and tuition costs for public school are climbing at a rate of 5.6% each year. Why not put $12 per month in a 529 plan. You have far greater odds at a college bill than anything a life insurance bill for a child can throw at you.
- One in three recent college graduates are out of work and less than half of Americans have even $1,000 saved up for emergencies. Perhaps it makes more sense to put $12 a month away to start an emergency fund for your child?
- The average balance in a retirement savings account is less that $60,000. Save $12 a month to open an IRA in your child’s name.
If piece of mind necessitates buying a policy to protect your child’s insurability, then I bid you good luck. Me? I’m going to put some extra money in a 529 plan for when college costs $205,000 for my children.
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I’m with you. I normally hate rules of thumb, but I haven’t found one convincing argument FOR buying life insurance on your non-income producing children. Great piece.
The only thing I could think of was for transferring wealth to children; assuming a policy with cash value. However, there are tons of ways to do it and an insurance policy would not top my list. Definitely, not a need for nearly all families.
THANK YOU for posting this, John! I know you got some heat for it, but I agree a million percent! Children cost money; they don’t make it. This is coming from a proponent for insurance as a whole!
Thanks for the encouragement. I have been called worse in a comments section by better.
John, I think inspiring vigorous comments means you’re actually doing some good! When you think about it, what’s the value in making a point with which everyone already agrees? When you and commenters offer a range of argument taking different perspectives on a question, everyone thinks and learns, and that’s good. Of course one hopes the discussion will be civil…
One can hardly expect civility on a news site. You are right though. Disagreement spurs discussion just as it did this article. Hopefully, in the end, readers benefit.
What if your child is a model and brings in more money than you and your spouse?
Kidding. Nice article, if only because those “Baby Life Insurance” articles are infuriating.
I’d still say to take a pass on the life insurance. What you’d want is to get your child’s face insured in the event it changes while they age and are no longer able to earn a living as a model. Furthermore, I’d require an accidental death policy be part of any contract signed to ensure at least some income coverage. Then my wife and I are quitting our jobs. JK
I don’t see nothing wrong with buying life insurance for your children when they are young. My parents bought it for me when I was young, and I bought it for my son. In fact, my policy is still in effect and I am in my 30s. Its cheap. The cost of how much you spend on toys, video games, eating fast food, etc. can pay for a policy for your children. Things can happen, we never know the future. It makes me upset when a child dies and then people are on the local news and TV begging for someone to help pay to bury the child. Pay the few bucks a month or yearly to cover the burial of your child. You don’t need an expensive policy. The information is freely available on the internet about average costs of a burial. Adults need to ensure they have life insurance to cover their funeral, too. And also enough to cover expenses, etc. especially if they have small children.
If you are worried about funeral costs, insure yourself as a parent and get a child rider added to your policy if you do not have enough cash savings for this type of expense.
I’m on board with your line of thinking here. I would rather put those funds to use in other ways to help my kids. Plus, the idea of hypothetical family memebers is a bit esoteric for me anyway 🙂
Me. I’ve got a 529 plan. There’s at least a four fifths of a chance in our children going to college and the benefits of doing so will directly benefit them and me.
I completely agree with you. That being said, I have to disclose that we have coverage for the DC. But only because for some reason when we bundled everything together, it made our rates go down, too. Not by a lot, but by enough to say “Why the hell not?”
We have a lot of policies with this institution, so I think we lucked out and bought all the right ones to be the exception to the rule.
I can’t argue with cheaper insurance. Although, now I’m wondering who you do insurance with and if I could have cheaper insurance with children life insurance policies?
You are right – personal finance isn’t usually one size fits all, but sometimes it is. Kudos to sticking to your guns.
Thanks John! I appreciate the support.
I don’t have kids yet, but this makes a lot of sense. Why should you throw away money for a super worst case and unlikely scenario? Sounds like a complete waste to me.
It really doesn’t offer much benefit. However, I’m not surprised if it sounds enticing with an insurance salesman sitting in your living room.
I’d disagree with you on this one. I got a universal life policy as a 21st birthday present. Now I can pretty much ignore that for the rest of my life, unless I have children and choose to increase it. When I first got it, my mother was the beneficiary, now it’s my spouse.
My cousin has had life insurance since she was about 6 years old; she is very grateful that her premiums are about $7 a month and she doesn’t have to worry or think about it, either. A lot of your options are presented as either/or, we were recipients of all sorts of savings and the life insurance has long lasting implications.
I definitely owe you a much longer explanation; I wrote this mostly to respond to the “buy life insurance to protect insurability crowd.” However, I do feel the same way about other benefits of life insurance for children; including death benefits and the savings component to some policies.
It’s a simple matter of where should your financial focus be? It’s a long list and I’d put many, many thing above an insurance policy for my children.
I agree with your analysis! That said, I’m delighted that you have been featured on Yahoo and would love to know how that is done!
I write for US News and World Report and that is picked up by business insider and yahoo.
With you for sure. No life insurance on my kids. Plenty on my wife and me!
Completely agree with the article.
My parents did that when I was a child (had moderately severe asthma) under future insurability, then realised that it was a waste and took the cash value a little later.
The other issue I have is that unless the policy lets you increase the benefit, it’s going to be woefully small by the time your 3 year old child needs it. a $50k benefit now sounds like a lot, but after 70-80 years of inflation, It will be the price of a tank of gas.