Should i Buy Life Insurance for my Child

Should life insurance be purchased for children? The answer depends on whether you are the financial advisor selling the product or the parent buying the product. As with many financial services products, financial advisors are more likely to sell them if they are profitable to the advisor but that doesn’t mean it is always a good idea. First, let’s examine what insurance in general is for, and life insurance in particular.

Insurance is a gamble – one in which we attempt to combat a negative event with a positive payback. We get insurance for our car in case we get into an accident. We get life insurance in case we lose our life and those we leave behind need income. When we purchase life insurance, in essence we are protecting our family should the worst thing happen to us. And just like car insurance, you either use it or lose it.

There are two types of life insurance: term and universal. Universal life insurance is more of a combination of insurance and a savings account. Your money goes towards a life insurance policy but if at any time you want to cancel (or “cash out”) your policy, you may do so. Term insurance, on the other hand, is more straightforward. There’s no savings account attached so, bottom line, if you don’t die before the term of the policy expires, your dependents get nothing.

It is important to remember the life insurance policies are not “everlasting.” That is, you purchase a policy for a set time such as 10 or 20 years. If you’re 50 years old, you’ll be quoted, for example, on a $500,000 policy good for 20 years. That means, if you live to 70 then all of the money you put in to your term life insurance policy disappears. You start over. And believe me, when you’re 70, the life insurance companies are going to raise your rates on another $500,000 policy. The fact is your rates increase no matter what your age since the older you are, the higher the risk you are to the insurance company.

So in case it isn’t evident by now, there is a very small percentage of times where life insurance makes sense for children. The main reason for life insurance is to support a surviving spouse and/or children. Since children have neither, term life insurance for children really makes no sense unless you want to “place a bet” that your child will die within the policy time frame. That is too morbid for most to even want to consider. Universal life insurance on a child is the only one that makes sense, and even then it can only be considered as a savings account with a backup plan should the worst happen. But even then, most parents probably don’t want to even consider the morbidity of their own child’s death, let alone possibly “profiting” from it.

If you ask me, life insurance for children doesn’t make any sense at all. The money would be better invested in either the stock market, real estate, precious metals, and/or a college fund. Or even a mattress may be the better choice in these crazy times.