Friday, July 24, 2020

Should I Buy Life Insurance For My Child?

Many times when I speak to parents of young kids I ask if they have life insurance in place for the children. While there are a few who do or are willing to consider it, the majority of these parents look at me as if I'm the most morbid person they have ever met. The thought of their child dying is something most won't even consider. 

As a parent I don't want to think about my child dying either. I have seen the pain on a parent's face that never seems to go away and as much as I grieve for their loss, I can not imagine how painful it is. With that said, however, I also know that things can happen. Children are prone to accidents and illness just like the rest of us and we should still prepare for the worst. 

As an insurance agent I have seen too many parents spend thousands of dollars on funerals for their kids, then have to hold a fish fry fundraiser to cover the costs. Or they resort to having to ask their friends and family to donate to their GoFundMe page. As if the pain of losing a child wasn't enough, now they have to solicit donations.

This can be avoided, of course, by making sure you have a life insurance policy in place for your child. Most of the objections from parents consists of statements like, "I could never profit off the death of my child" or "That's just morbid". When I mention that the average cost of a funeral is in the $8000 to $9000 range, they look at me like I'm insane. 

There are some very legitimate reasons why parents should consider life insurance for their kids and some are:
  • It's affordable. Kid's are typically healthy and their young age makes coverage pretty cheap. 
  • You don't have to "profit" off the death of your child. Parents can pay off funeral expenses and any other related expenses (like if the child was in the hospital prior to dying), and donate the remainder of the life insurance proceeds to a charity. Or they can start a scholarship fund. Nothing says they have to keep the money.
  • Buying life insurance at an early age helps if the child is diagnosed with something later. I know parents who bought life insurance when the child was a toddler, only to have the child diagnosed as autistic a few years later, thus making the child uninsurable. 
  • The child may need you to co-sign a loan. Whether buying a car or getting student loans for college, you may be on the hook for those loans if your child dies unexpectedly. 
  • The child can keep the policy. When your child grows up and becomes responsible, you can transfer ownership of the policy. The rate stays the same if the child decides to keep it and they will think you were a smart parent.
Now that we have determined that you should purchase life insurance for your child, we should consider what type of policy you may need. The most common scenario is the purchase of a whole life policy. This is because the rate is guaranteed to lock in for the life of the child, or in some cases, to a certain age. For example, I purchased a plan for my daughter which is paid up when she is 65 years old. After that she will have no more payments. And being a whole life plan, it will have some cash accumulation that she can borrow against or cash out if she needs to.

I am not a proponent of term life coverage on children for the most part. The coverage is only for a specified "term", usually 10 or 20 years. One exception is if your employer is offering a very inexpensive term policy through work. I've seen $10,000 policies that cost less than a dollar per paycheck, but be aware that if you leave that job, you probably will lose that coverage too. In these cases many parents will have both a whole life policy outside of work as well as the cheap one through work. "A couple of dollars won't break me," is a common refrain. 

Some people have begun using Indexed Universal Life (IUL) policies for their kids coverage. These are usually less expensive than whole life but offer cash value accumulation not available in a term policy. As long as it's structured properly from the beginning, an IUL can be a great alternative and have some money to use later on down the road. 

One last thing to be aware of is that most insurance carriers have limits on how much coverage you can put on a child. In many instances, a child can not have more than half of the coverage that a parent has. For example, if a parent only has $100,000 of life insurance, the child could only have $50,000. This rarely is an issue but does send up red flags when the parents want more. 

If you would like more information on insuring your kids, set up a time to discuss with us over the phone. And in the meantime, stay healthy.

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast.

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