Should You Buy Life Insurance For Your Kids?
Many financial experts say to avoid buying life insurance on your kids – that it’s a waste of money. Is it? The real answer might surprise you.
Life insurance isn’t just for adults. While many financial experts say to avoid life insurance for children, that advice isn’t always sound. It’s true that children have a low mortality rate in industrialized nations, especially the U.S. However, everyone dies. It’s also true that the younger a person is, the lower the cost of insurance is – all other things being equal.
Whole Life Insurance
While kids probably don’t have an immediate need for life insurance, they will eventually have a need. As a parent, you can help them get a jump start on that need. One popular option is a whole life insurance policy. Whole life is a type of insurance that provides a guaranteed death benefit and access to a cash surrender value.
This value, called a “cash value,” represents a cash reserve set aside to pay for the future death claim. The great thing is that, during your child’s life, he can use this cash value for anything he wants or needs.
The cash value grows somewhat slowly over time but, once earned, all cash is guaranteed against loss.
Premiums for your child are typically lower than what you would pay for a whole life policy at your age, and some types of whole life insurance – like participating whole life insurance – may allow your child to grow his death benefit over his entire lifetime. If you purchase a significant amount of death benefit for him, it may even drastically reduce the amount of life insurance he has to purchase later on in life.
Benefits
When your child is young, you will own the policy. However, when she turns 18, you can hand over ownership of the policy to her. Teach her how to manage her money wisely, and she’ll have access to an incredible source of funds when she needs it.
Whole life insurance gives you access to the cash value through special policy loans. Many life insurance companies provide preferred rates for policy loans, and these loans typically do not have to be repaid until your child’s death.
The funds can be used to buy her first car, make a down payment on a home, or pay for college tuition. Each loan reduces the available cash value in the policy but, as she repays each loan, the cash value is restored. If she continues to borrow and repay throughout her life, and continues to make premium payments, the policy will continue to provide cash to her until the day she dies.
Disadvantages
Whole life insurance is a long-term contract. One of the disadvantages to that is that your child has to be smart about managing his finances. Young people are sometimes a little short-sighted. If he stops paying premiums, or decides not to repay a policy loan, he may drain the cash value of the policy down permanently. The policy could possibly lapse, and he may lose his coverage.
This is why it’s critical that the whole life policy comes with some sort of financial education from you and from your financial adviser.
What To Do Next
Weigh the pros and cons of buying a whole life insurance policy on your own first. Write down everything that you can think of that would be a benefit to your child. Then, write down any potential disadvantages you can think of based on your own personal financial situation. However, don’t stop there.
Contact your financial adviser and have him review your list. Often, advisers can see financial situations and problems in ways that most other people can’t. He may be able to give you a second opinion that could change your child’s life forever.
