I have heard and read arguments by very financially astute individuals that it is unnecessary to purchase life insurance on an infant because they do not produce an economic value. Another way of saying that is because the infant does not produce an income there is no loss of income to insure against. I believe that argument is completely and utterly ridiculous.
I typically try to practice what I preach especially when it comes to financial planning. So when my wife and I welcomed our first daughter in December of 2017 one of several financial steps I took was to purchase a life insurance policy on her (I have since done this for my middle child and will for our youngest as soon as I can. There are three main reasons I took this step (all three of which I believe make a compelling argument for purchasing life insurance on a child). Before I go over these reasons I believe it is important to tell you about the type of policy I purchased: a Variable Universal Life policy with a $250,000 death benefit. Now, this is certainly not the right type of policy for everyone and the dollar amount may seem high for an infant, but I will clarify why I made these decisions below.
Reason One: The Unthinkable
No parent wants to even consider the possibility of something happening to their child. Simply writing about this gives me anxiety. The simple fact of the matter is if you know any parent that has lost a child, you know that there are, in fact, major financial implications. Often parents spend significant time away from work grieving. Even after extended periods of grieving, it may be difficult to return to work and perform at the same level one did before. Siblings and parents often need years of counseling. Emotions and finances are categorically intertwined and although emotional disaster doesn’t always lead to financial disasters, it certainly can be a precursor. With that being said, I will argue vehemently that the loss of a child can be financially devastating.
Reason Two: Insuring Against Uninsurability
Unfortunately, some people draw the genetic short stick and are predisposed to developing conditions and illnesses that will prevent them from buying life insurance as adults. If someone does develop a condition that would prevent them from buying life insurance, it can be a real issue if they have a spouse and children that depend on them. My daughter has $250k of permanent life insurance that I can give to her at a later date. Even if she is uninsurable in the future due to some unforeseen reason, her future family can take some comfort in knowing that there is some protection in place. This is part of the reason I bought a relatively large amount of insurance on her. Many child policies that I come across are five to ten thousand dollars. Although something is better than nothing, that dollar amount will not go far today (let alone 20 years from now).
Reason Three: Cash Value
In my opinion, cash value is an ancillary benefit of life insurance on a child. I firmly believe that a permanent policy makes the most sense for children. Permanent coverage on a child is inexpensive compared to purchasing similar coverage at a later age. I chose to go with a Variable Universal Life policy because the cash value is invested in the market, and quite frankly, I like the stock market. I’m paying quite a bit more than what the policy actually costs due to the fact that the excess premium goes into the cash value and is then invested. Although I don’t view this policy as a primary source for college savings, it could certainly help with tuition costs. I may also decide to give the policy to my daughter once she is of age and financially astute enough to handle it properly. She could then use the policy to help with the down payment on her first home or continue to let it build value.
The type of policy you should purchase on a child is a topic for another day. The important thing to realize is just because a child does not produce an income does not mean their life should not be insured. As parents, our list of responsibilities is long but at the top of that list is protecting the ones we care most about. Protecting our family doesn’t mean just locking our doors at night, it also means taking the steps necessary so that if tragedy does strike, the bills are paid.
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Written by: Brice Carter