Should you insure your child?

Buying insurance for your kids was once a more common practice, but does it still make sense?

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Should you buy life insurance for your child? It’s a morbid question, and one most parents don’t want to think about, but many likely do. The thinking is that if a child passes away, the parents would be so devastated that they wouldn’t be able to work. In that terrible scenario the money would help them get through those tough times.

Ed Rempel, a CFP with Armstrong & Quaile Associates, says that while that may be a valid reason to buy a policy, he doesn’t recommend it. Life insurance is meant for income replacement, he says.

The calculation to insure a parent’s income is well established. Should something happen to a parent then the insurance would payout enough to help cover expenses, like the mortgage and education for their kids. But insurance doesn’t cover emotional trauma, which is impossible to put a price tag on. “If a child is killed, then there will be a grieving process, but people will go back to work,” says Rempel.

A child doesn’t make money, so there’s no income to replace. “You need to look at the real need,” he says. “A child isn’t earning anything. Children actually cost more than they bring in.” From a purely financial standpoint—and he admits it’s not a pleasant argument to make—expenses will be reduced if a child passes away.

As James McKeown, a senior insurance specialist with Edward Jones, explains, it’s understandable that parents take time off after losing a child. Families need to cope with the emotional trauma of their loss. And while that pain may never fully go away, he says it’s unlikely the parents will quit their jobs for good. “Insurance isn’t about getting beyond the emotional impact,” he says. “It’s about compensating for a financial loss. Five-hundred thousand dollars won’t make it any easier for a grieving parent.”

Still, there may be a reason to take a policy out on a child. Most insurance companies allow parents to add a child rider, a provision that allows the policyholder to add benefits to an existing insurance policy for an extra cost. That rider might be as low as $2.50 a month and should a child die, it might give the parents between $10,000 and $15,000 to cover funeral expenses. Of course, if the child is unhealthy then the insurance will not be available.

The rider also gives the child the option to buy around $250,000 (it varies by company) worth of life insurance with no questions asked when the he or she turns 25. Some companies also offer $150,000 of life insurance and $100,000 of critical illness insurance, even if the person has pre-existing conditions that would preclude them from getting insured.

In most cases the rider is enough, but McKeown has seen some people take out a stand-alone policy for $50,000 on their kids to cover funeral expenses and a few months off of work. Generally, insurance companies won’t let you take out more than $250,000 on a child, and they start asking questions around the $200,000 amount. “They don’t want people to profit from the child’s death,” says McKeown.

Generally though there’s a simple reason why buying a policy on a child doesn’t make much sense: most people don’t die young. The low mortality rate is why policies are so cheap for 20-somethings. Still, while it won’t cost much to insure a child, it’s still a cost that the parent will have to pay each month. That money is best used elsewhere, says Rempel.

If there’s no real rationale to take a policy out on a child, then why was this practice more common 30 years ago? In the 70s and 80s many parents bought whole life policies for their children, but only because these products were used a savings vehicle; the policy could eventually be turned in for cash.

With such low interest rates today, and with savings options like the RESP becoming more popular (RESPs were introduced in 1974, but gained investor interest he late 90s when the government introduced matching grants) it doesn’t make sense to buy a whole life policy for savings reasons. “I see some career insurance agents trying to sell this, but it’s one of the dumbest ideas out there,” says Rempel. “If you want to provide some savings, it’s better to use something else.”

If you are in your 20s and 30s and have an old life insurance policy Rempel says you should cash it in rather than continuing to pay premiums. Take the money, which is a lot less than what the policy would pay out, and put it in an RRSP or TFSA, he says.

If you really do want to buy insurance, Rempel says the best option is a 20-year term policy. It’s cheap and when it expires the child could decide if he or she wants to take out their own policy.

10 comments on “Should you insure your child?

  1. Life insurance for kids should be two thing, maybe 5000$ for funerals and a option to multiple the basic protection without health questions in future. I would recommend a little bit of health insurances in case of the kids having major health issues that need that the dad or the mom leave their work to care for the kid in the hospital or at home. Beyond that put money away for the university and take advantages of the money of the goverment.

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  2. My daughter started school this year and they sent her home with forms to purchase insurance. They did state that the school had no coverage regarding accidents (eye injury, dental etc). Any thoughts to recommendations?

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  3. "If you are in your 20s and 30s and have an old life insurance policy Rempel says you should cash it in rather than continuing to pay premiums. Take the money, which is a lot less than what the policy would pay out, and put it in an RRSP or TFSA, he says."

    Really?

    Here is an example why that may be the worse advice.

    15 year old male has a $150,000 whole life policy with paid up additions
    Costs $2246 per year for 20 years.

    At age 25 cash value is $8241 death benefit is$185,000

    The adviser invests this at 8% so at age 60 this is worth $298,024 not bad.

    The same policy at age 60 has a cash value of $310,704 and a death benefit of $686,139 ( had the adviser just left the policy alone) Any guesses to what a term 10 policy would cost at age 60? How about $3450 per year! By age 70 it would be almost $2500 per month!!

    What confuses some advisers and the media is the cash value (for whole life insurance with paid up additions) does not equal the premiums put in until about year 17.

    So the first 10 years the cash value looks very small. So like a tree which takes years to grow it
    (first number of years) it seems small. So the natural statement would be it's too expensive!

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    • That's a good point. My parents did this same program for me back in the 80's. I talked to more than one insurance broker and insurance reps about it and their recommendations were similar. Further, many mentioned,

      1 – The returns were better than anything else they see today.
      2 – This system was grandfathered and I am lucky to have something that will cover me so well in the future.

      I'd like to understand if the author of this article might reconsider his opinion?

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  4. As Ed Rempel notes, insurance on children is not generally a financial decision. Purchasing insurance on children isn't 'wrong', it's just an emotional choice. So if you're going to do it, realize you're doing it for non-financial reasons, and buy (or not) as you want.

    I have more life insurance on my kids than many people have that are income earners. But I did so knowing full well it wasn't a mathematical argument I was going to make with anyone – I wanted, it, it's inexpensive, and I get plenty of secondary, non-financial benefits (they always have coverage no matter what, I locked in rates they'll never have available again, etc).

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  5. Pingback: Insuring a Child - Is It A Good Idea? - KNOWYI | KNOW YOUR INSURANCE

  6. The last sentence struck me. “It’s cheap and when it expires the child could decide if he or she wants to take out their own policy.”

    “decide”? There should not be any decisions to be make. Everyone should have Life Insurance. Everyone will need a funeral/burial.

    Insuring a child is the BEST thing to do as it guarantees insurability. Sure, the mortality calculators state that we should live into our ninties, but how many of us get sick, get diagnosed with something, develop bad habbits and gain excess weight. These are factors which aid in the underwriting process at the time the Life Insurance application is written. How many young adults will still be able to get Life Insurance or be able to afford it?

    I certainly hope every parent, who want to see their children succeed and prosper, will want to make sure that they have a financial security plan…and that
    starts with a Life Insurance policy.

    ASH June 5, 2014

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  7. I never expected to buy life insurance for my kids.

    Until last year when my best friend died somewhat unexpectedly on the operating table at the age of 41. He was born with a bad heart.

    He left behind a wife and an eight year old daughter. While his wife worked, he was still the bulk of the income, and most lifestyle choices were made knowing they had two incomes.

    His heart defect from birth meant that he did not qualify for much insurance. His father, however, was able to secure two policies when he was an infant. I beleive it was a smaller than usual death benefit plus an investment portion.

    When he died, these two policies (plus a third from his employer) where tremendously important. It is helping them survive so they don’t have to worry about financial issues while they deal with their grief.

    My views have changed. I am not really buying the life insurance for myself or even my kids. I am buying it for their families bause god knows I expect to love my grandkids as much as my kids. You never know when injury or sickness might strike, or even the possibility of being overweight, and it makes acquiring life insurance very difficult.

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    • Well said, David! I shake my head at the buy cheap term for 10 years and invest the difference advisors. They always sidestep the gaping hole in their strategy which is what is your plan B when your term 10 expires and your health has changed to a point you can’t renew? Meanwhile you may have kids and a mortgage to protect and your investments aren’t quite there yet. You can’t buy your children back but it will buy you time to grieve your loss and move forward.

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  8. YES! YES! You should always insure your children..
    I agreed with the philosophy that you should NOT and now I am over 65 helping financially with my grand child
    With 5 kids I purchase life insurance on my wife and myself only. When I finally applied for my first daughter it turned out she was uninsurable (asthma). She got married died at 27 and left a child 4 years old and no life insurance. Husband was in grad school so no funds. In the interim I purchased whole life insurance on the remaining kids and all now over 30 with fully paid up policies (over $250,000) that increase by paid up additions every year. Working two jobs paid off and by the way they all have completed graduate degrees. ONE SHOE DOES NOT FIT ALL

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