The discussion of this issue requires that we first of all analyze the purpose of life insurance. As morbid as it is, life insurance only pays off at death. All forms of insurance are a “necessary evil” in order to repair or replace something of value such as a car, home, lost wages, etc. If we knew that we would never have any form of loss, we would not waste money on insurance. There must be a loss in order for any type of coverage to pay. Coverage is purchased to restore a loss, not to make a profit. The odds are always in favor of the insurance company, otherwise, insurance would not exist. We sometimes begrudge the insurance companies of the odds being in their favor, but we are happy that our losses are few and far between.
It goes without saying that the loss of a child would be devastating and heart breaking. There is no amount of insurance money that can replace the value of a child. It is hard to set the emotions aside when it comes to your children, however, it is those same emotions that cause people to make ill-advised purchases. Life insurance has a primary purpose of replacing the lost income of a bread winner. Does a child bring in any income? Generally not, conversely a child uses income. Any of us with children know how expensive it is to raise them. We gladly bear those expenses, but monetarily speaking, children are an expense. Therefore, in most cases, children need little or no coverage.
There are a few instances whereby life insurance may be necessary for a child:
• Final expenses – Funerals can be expensive and there may not be sufficient cash assets to fund a unexpected funeral. A small life insurance policy for a child could be the solution at a minimal premium.
• Future insurability – Future health problems could prevent someone from being able to purchase life insurance after reaching adulthood. There are merits to this, however, the amount of insurance that someone may eventually need as an adult is so great compared to that of a child that it would be hard to justify the cost of carrying a large policy for all of the years it was not needed.
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• The younger you are, the less it costs – While this is true, life insurance costs have decreased so dramatically over the last 10 years or so, there is very little difference in cost between a one year old and a twenty-one year old.
• Cash Accumulation – Many thoughtful parents and grandparents have invested in life insurance to provide funds for their children and grandchildren for college education or just as a cash gift. As thoughtful as this may be, every life insurance policy has fixed costs embedded to pay for the coverage itself and cover the administration costs of the policy. A better alternative may be to establish a college fund such as a 529 Plan or Coverdell account.
If you determine that the purchase of insurance for a child is important to you, ask your insurance company or agent if the child can be added to your own policy as a rider. You can generally cover as many children as you have for one low price. The children’s rider may also have conversion privileges which guarantees future insurability.
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