Buying Life Insurance on a Child Part Two

I received an interesting e-mail in response ot my post about buying life insurance on a child.  In that post, my basic contention was that if someone isn’t able to work because of a loss of child, why wouldn’t they insure the child’s life so that one can grieve without the worry of working?  The e-mailer (who I hope is happily recovering from knee surgery) wrote,

Put that money in the bank and let it earn interest.  calculate the cost of $40 a month on a policy and the interest it would earn in an account….for how 13 years (on a 5 year old) as compared to what it is going to cost you for the policy.   I think we get fleeced sometimes too….but we buy into a lot of things, that are not necessary, unless we take the rose colored glasses off and really start questioning whether or not there are better alternatives and options.

First, let me say this – there are probably other options, I just wrote about one alternative to the main stream thinking of, “the child provides no income no insurance is necessary.”  That being said let the calculations speak for themselves.    Variables – 3% net growth (So depending on tax rate gross would be between 4% and 5%), $480/yr contribution put in on Jan 1 of that year, and allowed to grow all year.

Growth 3%
Year Age BOY Account Contribution EOY Account
1 6 $480 $494
2 7 $494 $480 $1,004
3 8 $1,004 $480 $1,528
4 9 $1,528 $480 $2,068
5 10 $2,068 $480 $2,625
6 11 $2,625 $480 $3,198
7 12 $3,198 $480 $3,788
8 13 $3,788 $480 $4,396
9 14 $4,396 $480 $5,023
10 15 $5,023 $480 $5,668
11 16 $5,668 $480 $6,332
12 17 $6,332 $480 $7,017
13 18 $7,017 $480 $7,721

I used the Growth Rate of NET 3% because the e-mailer said, “Put that money in the bank and let it earn interest.”   So, if my monthly expenses are NET $5,000/month it won’t be until our 5 year old child reaches age 14 before I have one month of expenses?  In my example:

  • A $100,000 Whole Life Policy on a 5 year old would cost less than $40/month (This contract would have a guaranteed $4,500 of cash in it at age 18 and about $6K at current dividend rates).

So, regardless of when the child dies, I will have over 1 year of expenses covered (using that made up number of $5,000 in the previous paragraph).  Alternatively, if at age 18 you want out of this option you can withdraw somewhere between $4,500 (guaranteed cash) and $6K (current dividend rate), while protecting the ‘what if’ of your child dying.

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