Purchasing Life Insurance For Children

When it comes to money decisions, it can be hard to figure out the right thing to do. Money is about power, emotion, morality, and security, among other things. So in this space, we gather personal finance luminaries to weigh in on a financial quandary.

This week’s question: Should you buy life insurance for your kid?

PRO
Yes, I’m a big believer in life insurance for children. I have life insurance on each of my three children. It allows them to have coverage which is locked in at an affordable rate regardless if they have a change in health down the road. This can be particularly advantageous if the child’s parents have health issues that are hereditary.

Many financial experts argue against it because the parent and not the child is the financial breadwinner. I totally agree insuring the parent is more the crucial of the two. But anyone who has lost a child or knows someone who has a lost child realizes the emotional upheaval this can have on the parents. The biggest advantage of having life insurance on a child is it gives the parents the time

 

PRO
 Life insurance on children should be discussed as part of a comprehensive tax and estate planning discussion with parents, especially if there is a family medical history of things like cancer, heart problems, colitis, diabetes, etc. because the best time to buy life insurance is when we are young and healthy — qualifying is easier and the premiums are much lower. Other reasons for buying life insurance on children include using it as an education-funding vehicle or for those of higher net worth, as a tax-free transfer of wealth from parents to children or grandchildren.
 

CON
Life insurance provides little or no benefit to the child. The main purpose of life insurance is to replace their income when they have dependents, which is typically not until age 25 to 30. Why pay a policy for 25 to 30 years just in case they might need it in the future? Any policy would be minor anyway. When your kids are married, they will probably need coverage of 10 times their income 25 years from now, which is likely $1-million to $2-million in future dollars.

The dumbest idea is to buy whole life insurance for your child. I’ve seen this awkward situation many times. Clients in their twenties cashing in very low return policies that were inflicted on them when they should be building wealth.

Parents have many more important uses for their money, such as life and disability insurance for themselves, their retirement goals, and their child’s RESP.