Friday, November 30, 2007

Life insurance on Children

Another example of a bad deal is life insurance on children. In rare cases where a child actually has a substantial income that others depend on, it can make sense to take out life insurance on the child. But, in most cases, insuring a child’s life makes no sense; remember that the insurance offers no protection from death!

I have had insurance agents try to talk me into insuring my children by arguing that I would need to cover funeral expenses, and that buying the insurance would guarantee future insurability. This was all nonsense. I can afford a funeral without the help of insurance, and if I couldn’t, I would choose something less costly than the standard funeral.

The future insurability argument requires more explanation. When you buy term life insurance for, say, 10 years, it comes with or without the guaranteed right to renew the insurance at a particular price after the 10 years are up. If your insurance is renewable, then even if you develop a terminal illness in the tenth year, the insurance company has to let you renew.

When it came to renewal in my case, the guaranteed price was about double what I was able to get after they checked out my health again. So, the renewal price would only have applied if I was at high risk of dying.

To get guaranteed insurability in case your child gets terminally ill later in life, you have to pay for life insurance for decades before it is really needed. This is a high price to pay the questionable benefit of continued insurability.

The final pitch that one insurance agent tried on me was “don’t you love your son?” This one caught me off guard, and I mumbled some sort of reply, but I wish I had said “get out of my house.” Prove you love your children by feeding them well, playing games with them and reading to them, not by buying pointless life insurance.

For more detail on the arguments for and against life insurance for children, see this CNNMoney article and this post on My Dollar Plan.

Overall it pays to figure out whether the insurance you buy is actually eliminating any serious risk to your finances.

5 comments:

  1. Thanks for the mention! I am shocked at the comment the salesman made; pretty harsh.

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  2. One thing I've thought about would be that life insurance for my child would give me and my wife the financial freedom to take some time off of work if he unexpectedly died. Of course, I could also use my emergency fund for that, but it was one argument that at least made sense to me.

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  3. The idea of being able to take time off is an interesting one. It's not enough to get me to take out life insurance on my kids, though.

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  4. hi mike, I feel you on that. however, i must say that i had a girlfriend who's daughter suddenly got terminally ill and died at age 4. her globe child insurance policy was term i think. she never had to renew it cause she used it so quick. they paid all her funeral costs for her daughter, cause she definitely didn't have anything saved for those types of expenses. so i guess it's different strokes for diffrent folks.

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  5. Sean,

    That must have been a very rough time. I can't imagine what it would be like if I lost one of my kids.

    If your girlfiriend's insurance was term and paid only enough to cover a funeral, then the premiums must have been very low, which would be the way to go if you have any life insurance at all on children.

    The pitches I've had from insurance agents have been for "whole life"-type insurance with the associated savings, etc. that leads to high premiums.

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