Saving For Education Fund

The other day at the end of one of my library talks, I was approached by a young couple who told me they just had their first child. They wanted to know some of the things they should do being as new parents. They had questions about life insurance and, in particular, life insurance on their child. Since they have had their child, they have said they’ve received all sorts of solicitations regarding life insurance for their newborn. They told me they thought it was a waste of money, but they wanted my opinion.

The one thing that somewhat intrigued them was that, on one of the policies, the death benefit started at $10,000, but could be increased to $100,000. The sales pitch was that by buying a life insurance policy now, it insures the child’s insurability into the future.

My answer to them was to save their money and not to buy life insurance for their child. First, life insurance is not an investment; it’s a means of insuring against financial loss. The question you always ask with regards to life insurance is if the proposed insured pass away, is there a financial loss to the family? Obviously, a loss of a child is very traumatic and tragic, but it is generally not a financial loss. There is no reason in the great majority of situations to insure a child.

With regards to the option to purchase more insurance down the road and the guarantee of insurability no matter what may happen in the future, it sounds nice, but in reality it’s not worth much. I believe it is very gimmicky. It’s sort of like saying you should buy a car today because you know that 18 years down the road your child is going to need a car. I believe most of us think it would be much better to wait until that time and see what is available. I apply the same thing to insurance. Why buy something today that you don’t need and may never need? In addition, the reality of the situation is that a $100,000 policy is not going to make a major difference to someone 30 or 40 years from now.

My advice for the couple was not to buy the insurance, but to save their money and invest it in a college savings program. My recommendation is that the couple start investing into the Michigan Education Savings Plan (www.misaves.com). The money they were going to spend on the insurance can be much more productively invested into a college fund. In fact, I recommended that they set up a college fund and then notify family and friends who want to buy the child a gift that they consider a contribution into the education fund as opposed to another toy that they’ll probably forget about in two weeks.

One last note: I did tell the parents that it was important for them to consider what would happen if one or both of them passed away and how that would financially impact the child. Not everyone needs life insurance, but life insurance can be a valuable financial tool to cover risk. In that regard, I told them that they should definitely consider term insurance, as I believe it is the most economical type of insurance and one that suits many peoples’ needs. Unfortunately, the salespeople push whole life and other types of expensive insurance policies, but for new parents, term insurance is almost always the better option. It is cheaper and it allows you to purchase the amount of insurance you truly need.