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 things they should be doing as new parents. In particular, they had questions about 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.
Not surprisingly, my answer to them was to save their money and not 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 regard 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. Therefore, there is no reason in the great majority of situations to insure a child.
With regard 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 think most of us think it would be much better to wait until that time and see what is available. I apply the same thinking to insurance. Why buy something today 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 save their money and invest it in a college savings program. My recommendation is that the couple starts investing into the Michigan Education Savings Plan (www.misaves.com). The money they were going to save on the insurance can be much more productively invested into a college fund. In fact, I recommended they set up a college fund and then notify family and friends who want to buy the child a gift, to consider a contribution into the education fund, as opposed to another toy 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 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, salespeople push whole life and other types of expensive insurance policies; but, term insurance is almost always the better option for new parents. It is cheaper and allows you to purchase the amount of insurance you truly need.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at email@example.com.