Kids and Money: Do Your Kids Need Life Insurance?


Last posted by Steve Rosen | Reading Eagle

Life insurance for babies likely isn’t on most new parents’ minds.

“Baby policies,” as they’re euphemistically called, are not only for children still in diapers, but teenagers as well. The coverage is relatively inexpensive to purchase when your child is young and in good health.

Baby policies also have many detractors, who argue, among other things, that the coverage is not worth the premium dollars because a young child doesn’t need his or her life insured, and that parents would be better off socking away money in a college savings account than in an insurance product, even one with investment benefits.

But consider the situation of this parent, who emailed me recently:

“I have a 2-year-old and 6-month-old. I’m debating what type of life insurance to get. I’m looking at getting cash-value life insurance so then if something happens, we still have the death benefit, but then at the same time after college they could use the cash.”

The parent was referring to policies, including whole life or variable life, that provide death benefit coverage as well as a cash build-up that can be tapped at some point, such as in the form of a loan.

Deciding whether to buy life insurance for a child, especially with all the coverage options available, easily can become confusing, which is why I always recommend getting advice from an insurance professional or financial planner.

But if that’s the direction you’re taking, here are some shopping factors to consider:

Know your goal: Are you buying a policy to cover a child’s funeral cost or to ensure your son or daughter will qualify automatically for additional coverage in the future? Is the insurance considered a savings or investment tool to help cover a future need, such as college? Would you be better off insuring your child by attaching a rider on your life insurance policy?

Harvey Bezozi, a New York financial planner, said purchasing life insurance on kids makes sense, if down the road you want to use the cash buildup for college or for a first home purchase. Another popular reason, he said, is that the policy provides income for children to pay estate taxes after their parents die.

Look for the GAP: One of the most compelling reasons for taking out insurance on your children is to guarantee their insurability in the event of a future serious health situation, such as a heart condition or severe asthma.

That’s why a rider often referred to as guaranteed additional purchase, or GAP, is important to include in your child’s policy.

As one insurance agent told me: “I’ve been selling policies on young kids for 28 years. That said, the majority of the time the primary reason is not because a newborn needs the actual life insurance. It’s because I always include the GAP rider. This guarantees that they would have the option to buy more coverage with no medical questions, no underwriting, no nothing.”

Full disclosure: My father sold life insurance for 25 years, and he purchased basic term insurance policies on all three of my kids shortly after each was born. These policies also could be converted later to whole life.

My father’s main reason for purchasing insurance was to guarantee future coverage. I’m glad he did, because two of my kids later were diagnosed with Type 1 diabetes. If they wanted to purchase insurance today, it would be difficult and expensive.

Compare policies: Ask an agent to break down the cost of the policy per $1,000 in insurance coverage. That’s a valid barometer, said Barbara McMahon, a financial planner in Kansas City, Mo. You also can check prices online.

Term policies are the least costly because they insure only against death.





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