Art by Jonan Everett
You might have a financial adviser or life insurance salesperson with whom you talk when you have major life changes. When you have a child, it's important to check in with that person to make sure that both you and your spouse have sufficient life insurance. After all, you don't want your child to suffer if the unfortunate happens and one or both of you pass away without proper insurance.
However, life insurance agents and financial advisers who are paid on a commission basis know that death inspires fear. When you're already contemplating your own mortality, salespeople and advisers sometimes take advantage of your mood to float the idea of selling you a life insurance policy for your kid. But is life insurance for children a good idea?
Further Reading: “Should I Get Life Insurance?”
Why Salespeople Say You Need Life Insurance for Children
Salespeople usually cite that funerals are expensive, which can be true. According to the National Funeral Directors Association, the median funeral for an adult cost $7,360 in 2016. Not everyone has $7,360 in the bank. Usually, that cost would end up on a credit card or as some other form of debt.
Potential Ineligibility for Life Insurance
However, the cost of a funeral isn't the only selling point that agents use. They also play on another fear: Your child could later become ineligible for life insurance. If your child is diagnosed with a serious medical condition later in life, he or she may not be eligible for life insurance.
The salesperson will tell you that you can get a whole life insurance policy that will be in effect no matter how long your child lives, as long as someone keeps paying the premium. There may even be times when you can add more insurance at a guaranteed preset cost without any medical exams.
Unfortunately, salespeople and financial advisers don’t sell whole life insurance solely to protect you.
Yes, someone will get a payout if the insured person dies while the policy is active, but there are better, cheaper life insurance products that will pay out, as well.
Further Reading: “5 Ways to Consistently Keep Your Life Insurance Current”
The real reason people sell you whole life insurance is because it’s a very profitable product for insurers. The insurers then use part of those profits to pay a hefty commission fee to the person who sold you the policy. Salespeople and financial advisers have to feed their families, too. Whole life insurance is an easy way to earn the money to put food on the table — it just usually isn't the right solution for you.
Despite that, it’s perfectly legitimate to worry that a funeral will become prohibitively expensive or that a child may become ineligible for life insurance down the road. Whole life insurance just isn't the way you should be dealing with these fears. Here's what you should do instead.
More Realistic Alternatives to Life Insurance for Children
The first problem — the cost of a funeral — has a simple solution. Rather than throw money away on whole life insurance for children, get a term life insurance policy to cover funeral costs. The premium will be much lower, and you'll still be able to pay for the funeral if the worst should happen.
The more responsible method is to build an emergency fund that could cover the emergency cost of a funeral. At $7,360, a funeral should easily be covered by a responsible three- to six-month emergency fund.
The second problem — your child becoming uninsurable — is much more difficult to address. A better way to use the premiums you would pay into a whole life insurance policy? Simply invest those proceeds on your child's behalf. Chances are, the investments' value will exceed the cash value after a few years or decades. After all, insurance companies simply invest the money you give them to cover their death benefit payouts. You can do the same and keep the profit for your child.
Sadly, many people don’t have the financial discipline to build an emergency fund or invest money on their child's behalf. If you know you don't have financial discipline, something is usually better than nothing. Whole life insurance for children falls into the “better than nothing” category, even if it does cost a ridiculous amount of money.
Further Reading: “3 Reasons You Should Consider Purchasing Life Insurance”