When Jeff Rose asked me to partake in his Life Insurance Movement I cringed and ignored it at first glance. I disagree with 97% of bloggers and personal finance when it comes to life insurance. I believe that when it comes to life insurance the majority of people simply regurgitate so-called experts as opposed to stepping back and critically thinking about the subject. One area in particular is when it comes to purchasing life insurance on a new born or infant. First we will look at logical reasons why everyone should consider purchasing permanent life insurance on a child, and then we will look at my actual example where I purchased whole life insurance on my boy.
I should specify that the type of policy I am referring to throughout this post would be a policy sold by a well established mutual company for a six figure plus death benefit (i.e. not a $25,000 policy seen on day time television). I should also mention that like my disclaimer indicates I am not providing any legal, insurance or financial advice.
Logical Reasons Why I am Purchasing Permanent Life Insurance On My Child
I had this discussion with The Wife way before my boy was born (but already after the sting of losing what I thought would be our first child); she, like most, thought it was morbid and unnecessary. I even blogged about the conversation we had about buying an infant policy on my child. Notwithstanding, I turned her based solely on the logical arguments below (numbers which are not her thing came later).
Replacement of Income
I often hear the response, “life insurance is for the replacement of income and your child doesn’t earn any money.” I am not sure about you but I am not going to work if something happened to my boy. For how long? I have no idea, but that should be my choice and not predetermined about the amount of liquid cash in my bank account.
When I first wrote about my decision to purchase life insurance on my child I received a moving comment,
I just wanted to share some insight on the topic. I just recently lost my newborn son and it was devastating!! I am the mother of three other children and when i had to abruptly leave work and stay in the hospital, it affects not only me but my whole family financially. Now I do carry term life insurance on my children through my job and when you have a baby you would add them on your policy within thirty days after birth. From my own personal experience you need time to grieve and let things sink in. For weeks I felt like I was In the twighlight zone,nothing felt real. The point that I want to make is that when something happens untimely and involves such a delicate matter its very hard to deal with. the last thing you want to worry about is finances. It makes the situation much worse.
In that particular reader’s situation it was an employment benefit which actually didn’t pay her a benefit because the child did not survive 14 days. Very heartbreaking. Notwithstanding for an amount that is less than most people’s cell phone bill you can get a great policy by a mutual company that has been around longer than some States (and may be even better rated than some municipalities) that allows the majority of people to receive their annual salary in a lump sum.
Guaranteed Insurability Later in Life
I have a really good buddy who, at the age of 19 developed Type 1 Diabetes. Life insurance was the farthest thing from his mind. Fast forwarded 9 or so years when he had his first child. Now his term policy costs 6x the amount of a preferred rated male who is the same age. SIX TIMES.
If his parents had purchased him the type of policy I am talking about they could have insured a way to increase the death benefit to account for two decades of inflation. If your agent is worth his commission he will insist you purchase some type of Guaranteed Insurability rider which will allow your child (or you) increase the death benefit at certain times.
For example, my son’s policy (details below) can increase in death benefit 3 times for an amount of $125,000 each time WITHOUT MEDICAL UNDERWRITING.
Let’s Look At the Numbers of Insuring an Infant
Part of my professional position provides me with the opportunity to illustrate policies. The company I work for is irrelevant as the product is not uncommon and as such you can talk to more professionals to find a similar result:
- Purchased a few months after my son was born
- $50 or so a month is the premium
- For Cash Account I used 2% NET to be generous
- For Investment Account I used 5% NET (so depending on your tax bracket we are in the 5 to 8% range gross)
|Age||Year||Cash Surrender Value||Death Benefit||Cash Account (2% NET GROWTH)||Investment Account (5% NET GROWTH)|
No, the insurance amounts are not guaranteed. There are minimum guarantees but I didn’t chart them out since the cash and investment account are NO WHERE near guaranteed either. At his 21st year of life I will have:
- About $1,707 less if I am investing in a cash account
- About $7,730 less if I am investing in an investment account
First and foremost, creating a sinking fund in case something were to happen obviously proves impossible. 21 years from now, ignoring inflation, I still would barely have anything to take off of work. For the “cost of money” prices above ($1,707 and $7,730) prices above I have have hedged the albeit small risk of my child dying (and subsequently not working for a bit) as well as the guaranteeing his will be able to obtain afford life insurance for the sake of my familial line for 21 years.
I have also created flexibility. Lets say I was done paying for this policy I have options:
- I can reduce the death benefit to have a paid up insurance product
- I can remove the cash and use for his/my benefit
- I can keep adding and watch the power of compounding take over.
I hope I will inspire at least one or two people to call a trained professional to check out an infant or child policy.
My in-laws got whole life insurance on my wife when she was a baby and now she has an affordable life insurance ($100 per year) with a decent death benefit and what will be sizable cash value closer to retirement to borrow against. I highly recommend this strategy to everyone!
If I were you I would check out the policy by getting an “in force” illustration. You may be shocked by just adding an addition 100 a year would do to the retirement income. Also an in force will let you know if it is crashing (big problem with VULs that were sold in the 80s).
The numbers on insuring children are just horrible. $50 per month for a non wage earner is crazy pretty much regardless of circumstances.
I think the child life insurance part of the industry preys on people “pre-grieving” for a child that might die. Not cool as far as I’m concerned. Maybe I’m cold hearted but I’m pretty sure I could go to work if a kid died. It would suck, but no worse than daytime TV, and I’d get paid for work and no one would really care how good a job I did for a while. I’d lose some income because I’d stop trading for a while, but I could certainly fade that.
“Maybe I’m cold hearted but I’m pretty sure I could go to work if a kid died. It would suck, but no worse than daytime TV, and I’d get paid for work and no one would really care how good a job I did for a while”
– I guess you and I can agree to disagree on grieving
“It would suck, but no worse than daytime TV”
My mouth literally just dropped. I’m guessing you don’t have children.
Count me as one who agrees with this. My parents had gotten me whole life policy when I was born and I did the same for my kids when born. Though not as large sum as yours. I always thought it was good for a couple of reasons, getting insurance at low rate for future, accumulate cash value, and terrible as it may seem, to help pay for funeral. Evan brings another good point that I never considered but feel is valid. Replacement income for parent. If it happens, no way am I going to work anytime soon like you.
Thanks for the comment Wayne!
How does the policy your parents bought you look? Ever run an in force illustration to see if a few bucks more per month could super charge that into a pension like vehicle?
Evan, this is a VERY compelling argument that you never hear from the regurgitation crowd. While agree with W at Offroad, that “I could go to work,” do I really want to do that? Back in “the day” when I was an advisor, I’d never try to sell anyone on this topic. I’d present the numbers and let them decide. Sometimes a topic is too emotionally charged.
VERY emotionally charged discussion which is why I can’t begin to understand why people who have the means to do it wouldn’t do it. If you are so attached to your children (as I am) that the very thought of death ends a convo why wouldn’t you want to at least ease the pain to let you grieve on your own terms.
Think you have twins? Did you get policies on them? How did they perform 17 years later?
Let’s see, the babe is about a 18 months old now? So, let’s say he cashes the thing out when he finishes college to grubstake his adult life. So that gives it about 21 years to grow. Hmmm… 21 x 12 x $50 = $12,600. That gives you a return on investment of $1,181. Wouldn’t you (and he) be better off if you simply invested $50 a month in a Vanguard index fund for him?
It’s unlikely he’s going to die in childhood or early youth — sure, it could happen, but actuarially the chances are pretty remote. At the rate you’re going, a $173,000 payoff won’t represent much, relative to what you’ll be earning and will have accumulated…tho’ if he has a young wife or children, it would be a godsend. One online rate of return on mutual funds calculator shows that your rate of investment return on the $12,600 invested at 8% over 21 years would be $17,966, providing him with $30,566 to launch his adult life.
Like life itself, it’s a crap shoot. I dunno. Moi, I’d be inclined to put the money in an investment for him and hope he survived to collect it.
Good Memory – 20 months soon to be 21 (born on the 1st). In terms of an investment – yes. But the number you have to look at is the difference between the investment account and the estimated cash value. So the 13K vs the 21K (5% Return) – that 8K is in today’s dollars and has provided protection for 21 years against the downsides discussed. For example and GOD FORBID, something happened and he passed away at age 5 I would only have $3,300 which would barely cover 1 mortgage payment.
The reason I use 5% is because I am estimating netting out after taxes.
interesting thought evan, and I think you hit the nail on the head here – this is what insurance is for. no one expects to lose a child, so no one really knows what they will do or how they will act if/when it happens. This is a sound fall back plan.
Good way of looking at it…maybe I’ll throw myself into my work but for The Wife’s sake I couldn’t imagine doing that.
I never thought of life insurance for a child this way. It was always in my mindset that it was for the loss of income of the person being insured, and obviously my 18 month old doesn’t bring home income, unless you count sand and sticks.
But you are right that God forbid if anything did happen, I wouldn’t be going back to work. And that would obviously have an impact on our finances.
My Boy LOVES rocks and sand he hasn’t gotten that much into the sticks LOL.
Been a couple days have you contacted anyone? Is it something you are really going to move on?
I’ve read this post with an open mind.
When you look at insurance, a term life insurance policy for a 40 year old male is about $800/year, thats for 1 million. The policy presented in the post us about $600/year for only 150k. This child policy is a term policy plus an investment account.
The question is what would a term policy cost alone for a baby? Its probably so low no one would write it just look what it costs for a 40 year old. All of the money In the child policy goes to fund the investment component. As has been already mentioned its a poor return.
You are better off simply saving the money yourself.
“You are better off simply saving the money yourself.”
– He becomes uninsurable later in life…what happens then?
Life insurance, especially when it comes to children is definitely an emotional topic. However, just like with any other finance related topic, to see the best possible path, people need to remove emotion from the equation so they can make the right decision. And, based on the number in this article, taking out a similar policy is something that needs to be considered.