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.