Let’s face it: Thinking about the death of your child is almost more than you can bear. But you’ve seen those sweet baby-faced commercials urging you to buy life insurance for your child, and you wonder whether it’s a good idea. After all, you’d do anything for your kids.
So, what’s the right thing to do? Here’s the honest truth: Getting life insurance for your kids is not the best option for your family. We’ll explain all the choices without any emotional hype so you can make an informed decision.
Why People Buy Life Insurance for Kids
If buying life insurance for kids is such a bad idea, why do so many people do it? For one, advertisers do a great job of pulling at your heartstrings to make you think it’s the best thing since home delivery for your groceries. But there are some other myths people believe about life insurance for kids. This is what you’ll hear:
It provides a savings vehicle for my child’s education.
You’ve probably seen this as a feature of whole life insurance for children. The idea is that the monthly premium will build up savings for college. Sounds great, right? Not so fast.
First, the fees will eat away at your return. And the return isn’t great—about as much as a traditional CD (Certificate of Deposit) you’d get at a bank. Not only that, but you’ll also have to pay fees to get your money when it’s time to pay tuition. In what world is this a good idea? Not the real world—that’s for sure.
It guarantees my child can get more life insurance later.
Some parents and grandparents want to make sure their kids can get good life insurance even if the kids develop a medical problem early on.
The truth is, most people in their 20s and 30s have no problem getting a good term life insurance policy, so there’s really no need to buy life insurance for your kids.
If you do buy life insurance for your kids and they want to carry their policy into adulthood, they can only get a limited amount added to it. And in many cases, that amount is too small to provide for their family long-term.
It covers funeral expenses and other costs.
Yes, life insurance would cover funeral expenses, but the likelihood of actually needing it is so slim that you’re better off putting the monthly premium payments into a savings account. Then you retain control of that money and can use it for other reasons, like if your child needs their tonsils taken out. And that type of emergency is much more likely to happen!
Alternatives to Children’s Life Insurance
If you don’t buy life insurance for your child, how do you pay for burial expenses if the unthinkable happens? We’ve got an easy fix. Instead of paying premiums, you can put that money in an emergency fund. If you stash away three to six months of living expenses, you can cover the cost of a funeral—or any other emergency that might pop up along the way.
If you don’t have that money stashed away yet, you can get a rider for your children on your term life policy (or your spouse’s). A rider is an add-on to a basic policy. Think of it like adding bells and whistles to your car.
This kind of rider is pretty cheap—around $50-60 a year—and it covers all your kids, no matter how many you have, until they are no longer member of your household (that’s what Dave did for years).
How to Invest in Your Child’s Financial Future
As a parent, you want to set your child up for success—especially when it comes to money. So if you were thinking about getting life insurance for your kids as a way to start them out on the right financial foot, here are some better ideas than opting for a life insurance gimmick:
• Open a college fund. Basically, there are two kinds of college funds: a 529 plan and an ESA (Education Savings Account). There are pros and cons to both, but either one would be a much better choice than a whole life insurance policy. As a plus, you get some tax benefits!
• Open an IRA. An Individual Retirement Arrangement is a great way to get your kids started out right. You don’t have to fork over a whole lot of cash to open one, and you can add to it a little at a time. You can even offer to match any money your child puts in it, showing them the value of an employer match!
• Open a custodial account. You might have heard of the UGMA (Uniform Gift to Minors Act) and the UTMA (Uniform Transfer to Minors Act). Fancy words, simple concept: Think of a savings and investing account that minors can’t touch until they become adults. But there are lots of rules with these accounts (for instance, this money counts against your child’s financial aid), so know what you’re getting into first.
Do You Need Life Insurance for Your Child?
The reason you buy life insurance is simple: It replaces your income if you pass away and helps your family take care of their financial needs when they can no longer rely on your income. But since you don’t depend on your child’s paycheck (they depend on yours!), there’s no need to buy a policy for your kids. It’s easier and cheaper to get a rider on your own term life policy.
Here’s the deal: You love your children and want to start them out on the path to success but getting a life policy on them is the wrong road. The best insurance move for your family is for you and your spouse to get term life insurance. That way, if the unthinkable happens and one of you passes away, you know the policy will replace your income and put your kids in the best spot possible.
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Josh specializes in retirement income strategies, investments strategies, as well as additional financial strategies. His focus is on lifelong financial guidance and his commitment is to place clients first and provide unmatched customer service. He would be glad to answer any questions regarding the content of this article as well as any others. Call today at 570-729-1020 or email Josh at email@example.com. You can also visit www.sageinvestments.net.
Jonathan Sheard offers securities and advisory services through Centaurus Financial, Inc. member FINRA and SIPA and a registered investment advisor. This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in PA, NY, AR, VA, FL, NC, GA, CT.
Sage Investments and Centaurus Financial Inc are not affiliated.
Published in Connections Magazine March 2020 Issue. Copyright 2020.