20 Aug Why you shouldn’t buy your children a life insurance policy
Even though your children throw embarrassing temper tantrums or argue with you constantly, you love them. That’s why it may seem like life insurance for children is a no-brainer. After all, according to what insurance companies have told you, your child should benefit from a policy in two key ways:
1. If you buy a policy now, you’ll be able to “lock in” rates for your children. This means that when they become adults and have their own families, they’ll be able to buy the life insurance coverage they need, regardless of their medical history.
2. The policy will also serve as an investment vehicle, providing your children with access to savings they can use in the future.
Based on these simple and intuitive arguments, buying life insurance for your children or grandchildren seems like a key responsibility (just like making sure they don’t stick their fingers in electrical outlets). So if you haven’t bought a policy for your children, you shouldn’t be able to sleep at night, right? In fact, you’re such a horrible parent that we’re going to have to call child services immediately!
Seem a bit dramatic? It is. Because contrary to what your life insurance advisor may have told you, children’s life insurance isn’t as simple as the two arguments we outlined above.
Buying life insurance for children isn’t as smart as you think.
When you actually break down the numbers, run through the projections, and analyze the outcomes (and trust us, that’s all we do around here), you’ll see that buying life insurance for children isn’t a smart financial decision.
Let’s tackle the first argument that buying insurance for your children now protects them from being ineligible for coverage later on.
It’s true that there are some cases where medical issues develop early in life and it becomes hard for a person to get life insurance later on. However, buying insurance policies for children before they develop medical issues gives them only limited protection because the amount of “guaranteed coverage” they can purchase in the future is limited. In fact, the amount of coverage your children will get is rarely anywhere close to the amount they’ll actually need when they have a family.
So in reality, buying life insurance for children is really just an expensive way to give them limited protection against a remote risk.
What about the argument that buying life insurance for children is a good investment?
Well, no matter what your life insurance advisor might be telling you, the savings component of an insurance policy won’t match the performance of a traditional investment account. Remember that insurance is a risky game for insurance companies. So even though the chance that your child will die early in life is very low, your insurance company still has to protect itself against this unlikely risk. That’s why it’ll make annual deductions from your policy to cover insurance fees. And what happens when these insurance fees add up (which they inevitably will)? You guessed it: your returns decrease, and those deductions lead to a significantly smaller future account value than what you would have earned with a traditional investment account.
In sum, the high cost of insurance can put a massive dent in those investment returns.
So what can you do instead to protect your children?
Buy life insurance. But instead of buying it for your children, buy it for yourself and your partner.
It’s never rainbows and butterflies to think about the possibility that you or your spouse may die before your children become adults. But because it could happen, it’s important to make sure your children have the financial security they need to make it to adulthood. When you buy insurance, make sure you buy only the protection you actually need and don’t waste money overprotecting your family.
What should you do if you have the coverage you need and want to do more to support your children? Instead of buying a children’s life insurance policy, open a traditional investment account that you can build up over time and hand over to your children in the future.
Be wary of claims about life insurance for children.
If there’s one message we want you to take away from this, it’s to be wary of all the atypical life insurance strategies that some advisors pitch. The marketing messages they use can make policies seem very tempting (just like a swimming pool on a scorching summer day), but without the right analysis and scenario projections, you should never take them at face value.
Remember that when it comes down to it, life insurance is supposed to give your dependents the financial support they need to cover expenses that your future income would have paid for. If your insurance strategy is accomplishing anything else, you’re probably paying for it without even knowing it.
Whether it’s children’s insurance, tax-effective estate planning, or corporate investing (to name just a few), don’t be fooled by alluring marketing messages, and always make sure you have the tools you need to make informed decisions.