More Life Insurance For Kids

I recently wrote this blog post, Life Insurance for Kids—Really? and in the article I discussed why it might not be so crazy to get life insurance for a child.

For example:

• Barring extraordinary circumstances, life insurance protection on a child is inexpensive.
• Assuming that there are no health issues when applying for life insurance protection, the policy is usually issued without a problem.
• If a health issue arises later in life, the child may be uninsurable or only insurable at a high premium. By getting the life insurance early in life, you have locked in protection that can last a lifetime.
• If you have adopted your child, little may be known about his or her medical history. If no health problems are manifest at the time life insurance is sought and the policy is issued, you have also locked in protection for the child.

So, what’s the common denominator?
Each recognizes life insurance as protection. A parent cannot replace a child with money, although, I suppose, it could be a means of allowing them to later adopt, but that’s pretty grim. Moving past that, the big reason for buying insurance for a child is to secure protection for later in life like when he or she marries and has a family of his or her own.

More Reasons To Buy Life Insurance for Kids And Types of Insurance

Many buy life insurance for a child for other reasons. Here are a few and some pros and cons to consider:

A whole life insurance policy, if bought at birth or a young age, will build cash value plus provide insurance protection.

• Pro: The cash value can be used to finance a portion of a child’s education, or be applied toward a car.
• Con: Cash value grows slowly at first and only as the policy ages does it start to grow faster. Therefore, it will take years to really start accumulating. Also, the amount of cash value, even over a long time, is a function of the size of the life insurance policy. The larger the amount, the larger the cash value over time. BUT, a larger policy means a higher premium payable over a long time. Plus, there is no guarantee that the cash value will be enough to pay tuition, books, dorm, or a car even 18 or-so years down the road.
• Pro: At least some of the cash value can be borrowed for any reason. This could help in an emergency or if the child (once an adult) has no other source of credit. Plus, the policy loan does not have to be repaid.
• Con: A policy loan is charged interest at a rate stated in the whole life insurance policy. If the loan is not repaid, interest accrues and eats into the death benefit. If it is forgotten or neglected, the purpose of buying the life insurance (to provide protection against premature death) may be compromised by a reduced death benefit.
• Pro: The premium for a whole life insurance policy is level for the life of the policy; the policy can also reach the point of being “fully paid up” so that no additional premiums are required.
• Con: Because of the feature of cash-value, the premiums for whole life insurance are higher than for term insurance. Therefore, if you are going to establish a life insurance program for a child, especially with a higher face-value whole life insurance policy, it is important to make sure that the child will be able to afford the premiums once you stop paying them. While accumulated cash value may be enough to pay them for a while, the cash value may run out. If the child does not then pay the premium, the policy will lapse.

A term life insurance policy, no matter when it is purchased does not accumulate cash value. It pays only a death benefit. It is bare-bones protection.

• Pro: If bought at birth or at a young age, term life insurance is very inexpensive. Ordinarily, a far greater amount of term life insurance can be purchased for the same premium as whole life insurance.
• Con: Since term life insurance doesn’t accumulate cash value the policy will lapse for non-payment if the premium is not paid when due or within the grace period.
• Pro: Term insurance is simple to understand and it frees up money for other things.
• Con: While that is generally true, term life insurance premiums increase with age and can get expensive.
• Pro: Term life insurance policies can be purchased with level premiums for various time periods. For example, if you want to buy a term policy for your 10-year old son you can get a 30-year level term policy. If issued, the premium will stay the same for 30 years, until he reaches 40. There may be longer terms available, too that give additional protection while raising a family.
• Con: At the end of the term, the life insurance will end. If life insurance is still needed, the premium and availability of coverage will be based upon his current age and heath condition(s).

Remember, I’m not a financial planner nor do I sell insurance. I’m Luke Brown, The Insurance Problem Solver. I am here to get you to think about insurance, educate you about insurance, and answer your questions about insurance. Incidentally, I am also available to write about insurance for insurance companies, agencies, brokers, publishers, and websites.