Life Insurance For Kids…Really?

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And, now, back to the topic at hand — Is life insurance for kids?

Is Life Insurance For Kids?

One of the issues that often arises for both young families (parents) and for older adults (grandparents) is the wisdom of getting life insurance for kids. I’m going to define “kids” broadly, because to parents, their offspring will always be “kids.” Likewise, grandchildren will always be “kids” to grandparents.

The Controversy Around Life Insurance For Kids

There is much controversy among financial advisers and planners about the wisdom of life insurance for children. According to the most recent statistics that I could find through the Centers for Disease Control and Prevention there were just over 3.9 million births in the United States in 2013. That makes for a lot of diapers. It also can potentially make for a lot of insurance applications.

People generally, and Millenials and Gen X’rs in particular (who I will define in general as being of family-starting age), should understand that insurance is an important pillar of their overall financial planning. The other pillars, of course, include savings and investments. They may turn to financial advisers and planners for help in charting the financial future, as well they should.

What is important to realize, though, is that many financial advisers and planners are also licensed insurance salespeople. While most all of them are highly ethical and adhere to high fiduciary standards, remember that selling insurance (and earning commissions on the sale) may be part of their stream of income. Therefore, in some cases they may err on the side of recommending life insurance when it may not be needed or at least, when the purchase could safely be delayed…as in the case of children. That is the crux of the controversy.

As I’ve said in earlier articles, insurance is protection against a risk. It is not an investment. If you want an investment, buy a CD, a mutual fund, stock, silver, or gold. The risk against which life insurance protects is premature death. At that, it replaces the income of the insured. In most cases, the beneficiary of the life insurance policy is the insured’s survivor(s) who may have depended upon the insured for support.

The obvious difference between life insurance on an adult with dependents and life insurance on a child is that the child has neither income nor dependents to protect when the insurance is bought. But kids grow up, some get ill, have serious accidents, die, and many ultimately have families.

Those realities create certain insurance and when-to-buy-insurance issues, like:

• Suppose a child develops a serious medical condition or sustains a catastrophic injury before a life insurance policy is purchased. While there do exist “guaranteed issue” life insurance policies, they are often limited in amount and availability than customary ones that are medically underwritten.
• Since pre-existing conditions are allowed to be considered by a life insurance company in evaluating an application, the child may be uninsurable.
• In contrast, had a life insurance policy been purchased before the medical condition was manifest, the parents (as applicants) could have honestly answered “No” to the medical questions on the application and, all other things being equal, the policy would probably have been issued. This is also true when an adoption is involved and there may be very little known about a child’s medical history (unless a condition is manifest when application for insurance is made).