Why I Will be Purchasing Life Insurance on My Newborn Baby

Why I Will be Purchasing Life Insurance on My Newborn Baby

I distinctly remember the pain and helplessness I felt when The Wife and I lost our first baby in utero to a blighted ovum, and that wasn’t a child I had the honor of raising. I am not sure how I would handle if anything were to happen to my son, but I do know that work and this blog (my two main sources of income) would certaintly take a back seat.  Only if there was a way to protect one’s assets in case of an unforeseeable and untimely death…oh wait there is!

Protecting a Parent’s Income with Life Insurance on a Child

I have approached the subject of buying life insurance on a child with The Wife prior to the birth of Baby Boy, and she made it pretty clear that she thought the whole topic was morbid.  Although she is also the same The Wife who thought it was morbid when I increased my insurance when Baby Boy was born…said she would rather me alive.  Poor The Wife didn’t get that so would I lol.

While I think there are other uses for life insurance, most people won’t argue with me that a main purpose of life insurance is used to protect one’s income in case of untimely death.  What is more untimely than a child dying?  I couldn’t imagine anyone really arguing against this reason if you have the income to purchase a policy, but there are additional reason besides protecting the income lost from taking time off of work from a child’s death.

I am obviously not talking about one of those cheap $20,000 policies.  We are talking about a six figure death benefit with various riders.

Reasons to Purchase Life Insurance on a Child

Beyond protecting income I think there are a few other fantastic reasons to purchase life insurance on a child:

Guaranteeing Insurability

I have a really good friend who was diagnosed at age 19 with type one diabetes.  Want to know what his life insurance costs? His term policy costs approximately 7 times an insulin producing 29 year old.  Does he have a choice? With a mortgage, significant income producing ability, and a 7 month old…No he doesn’t have any choice so he pays the bill monthly.

After looking at several policies and life insurance rates, the policy I will be purchasing for Baby Boy will allow for an increase of death benefit at certain policies anniversary dates.  So God forbid there is a speedbump in Baby Boy’s health he’ll have insurance that will increase as he gets older.  This insurance can be transferred to him without any income tax ramifications and most likely gift tax issues so he can use it for the benefit of his family.

Cash Value from Permanent Policy Can be Used Later in Life

The company I work for does not sell term policies to children, nor would I even want one.  The cash value can be used for:

  • College
  • College Graduation Gift
  • A wedding
  • A wedding gift
  • Never used because he now needs the seasoned life insurance policy

At age 22 with the riders I put on I will have a 0% Internal Rate of Return.  If I were to remove those riders the internal rate of return would be about 3% which isn’t terrible on a cash account of the course of 20 years.

Choice with Life Insurance on a Child

For me, it is all about choice.  For less than what my cell phone costs a month ($50) on my 2 month old I will have:

  • A policy that will return my money at approximately age 22 (0% Internal Rate of Return)
  • A policy that provides me the choice of increasing his death benefit even if he were no longer insurable
  • A death benefit that will provide for The Wife and I while we mourn so work and income can come in a far second as compared to caring for our family
  • A policy that doesn’t have to be paid if he were otherwise able to work and can’t (it is called waiver of premium)
  • Peace of Mind

42 Responses to Why I Will be Purchasing Life Insurance on My Newborn Baby

  1. I don’t think it’s morbid at all, and like Sam I say anything that makes you sleep better at night is a good investment.

    My parents had a policy on me until I was 18 years old. It made good financial sense, and did its job. Why open up the risk of having financial trauma on top of emotional trauma?

  2. Just wanted to pop over and say hi from Man vs. Debt. Interesting blog post. I’m going to check with my parent’s now and see if they have/had a life insurance policy on my brother and I. Thanks for sparking a family conversation.

  3. Great blog, Evan. I’m a huge proponent of these types of policies, as long as the parents are taken care of as well. Those who bemoan the fact that children don’t create an income therefore we shouldn’t insure their lives don’t think about things like guaranteeing insurability for life. The policies on my children are similar to yours. At 22 they can purchase an additional $150,000 of insurance, and do this every three years until 40. That’s an additional $1,050,000 of life insurance at PREMIER rates! That’s also in addition to how the death benefit grows each year with the dividend that the company pays. (I buy from a highly rated, MUTUAL insurer).
    Great stuff…glad to see you did this, and I can speak from experience in dealing with my clients that your children will thank you later on in life.

  4. We don’t have life insurance policies on either of our children. Maybe we should discuss this. The one thing that scares me the most is loosing one of my children!

    When my wife was pregnant with our first child we put together a will. Going through all the different aspects of putting together a will can also be morbid as you have to think about death and who will get custody of our kids, etc. We do have sizable life insurance policies on each of us to ensure that if one of us dies the other won’t have to worry about bills or work (if we don’t want too) and still raise our kids.

    • I think it is fantastic that you guys figured out how much you would need so the other spouse doesn’t have to work.

      Did you go with permanent policies since you seem to be building a real estate empire and will ALWAYS need the liquidity?

  5. I agree with everyone, I think it is a good choice for you and your family. This is not a lot of people think about and even if you suggest, they might be offended but you did the right thing for your family.

  6. I think that it is a very good idea to buy life insurance on a child. Basically, you know that if something happened, you would suffer a loss of income because work and this blog would not be priorities at that time – so you need to have protection!

  7. Wow. I have never heard those reasons listed before. I use to think it was morbid my parents had a life insurance policy on me (term), but I guess it makes sense in many ways. Now that I am an adult I know I sleep better knowing I have some life (for my wife’s benefit) and more importantly since we do not have children as yet, disability insurance.

  8. My grandparents bought a policy on me when I was born, and later I used the money to help with a car purchase (well, it was only $5,000 so it just helped…)

  9. I had never even considered this before – it’s definitely a new idea to me. Though we don’t have children, I can see how life insurance might bring peace of mind in case something tragic happened.

      • Yes – we set up term policies for each other after getting married a few years ago. It’s nice to know that if something happened to me, she wouldn’t have to worry about finances for a while.

  10. Looks like I’m going to have to disagree with you (and almost all the other commenters)on this one. I think a term policy to cover funeral and burial expenses for a child is plenty. $50 per month for a 2 month old sounds excessive. It just seems like the risk isn’t great enough to justify the cost. However, personal finance is, after all, personal.

    • Actually I thought most people would have disagreed with me!

      “It just seems like the risk isn’t great enough to justify the cost.”
      - Interestingly I found out after talking to some people in the industry on the product side…insuring a 2 year old used to be cheaper than insuring a 2 month old.

  11. Very interesting reasons that I think many don’t think about. I never considered loss of income while mourning.

    If you have the income, like you mentioned, it does make sense to purchase this kind of policy.

  12. Hm. Well, this does sound morbid, but y’know, a life insurance policy on a child could protect you in another way. If the child gets an expensive disease whose costs outrun your health insurance, collecting on life insurance after the child passes could get you out of debt.

    I recently did an article for a business magazine on a new nonprofit that provides respite and end-of-life care for families with direly sick children. Many of these folks have children who have been terribly sick for years. It’s heart-rending and something none of us wants to contemplate…but it does happen. And you don’t even want to think about what such an illness would cost.

    Obviously the policy would only help you after the fact, but in those circumstances it would help a lot.

    • To build on your comment there are companies that you could sell the policy to if that situation arose so you could avoid some of the debt (google Life Settlement)

  13. I’m missing something.
    Is the payoff to pay for funeral expenses? To cover time you’ll be out of work?

    As I treat it, the purpose of insurance is to cover lost income or services when a parent dies. I say “services” because it can be expensive to care for the child of a stay at home mom who passes, so “no job” is not an excuse for “no insurance.”

    My daughter dies, I don’t need or want a cent. I want a face to face with The Big Guy ™ and ask him WTF?

    • The way I look at it Joe is that it is to cover lost income and services of The Wife and I if something were to happen to our boy.

      I am not going to work nor do I expect The Wife to work OR handle house work.

      What’s up with the trademark on The Big Guy lol?

  14. I always used to think baby insurance was a scam. Like Joe Taxpayer said, no amount of money could fix me if I lost one of my kids. But you do make an interesting argument about it temporarily covering expenses while your income took a hit because you couldn’t work. I never thought of it that way.

  15. Wow, i couldn’t imagine. I see your point on this, but I think it is a little morbid (for me personally).

    I, wrongly i’m sure, have always viewed life insurance as a bet against yourself. Collecting on my dead child would be a very bad day.

    However, you have given me some food for though.

  16. Although I don’t fully agree with you, particularly if it’s true you can’t buy term insurance on a child, I can understand the argument that if you’re self-employed you would take an income hit while dealing with the death of a child. But 6 figures seems excessive (admittedly, I don’t know what your lifestyle requires per month) – losing a child is devastating but life does go on. Also, whole life/cash value insurance has historically been the worst possible form of investment to cash out down the road, so that seems more of a rationalization (& sales pitch) more than a legitimate argument for putting your money there. Although the difference may not be that huge these days since other savings venues aren’t offering much of a return.

  17. Ijust wanted to share some insite on the topic. I just recently lost my newborm 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. One important issue I would like bring up is if you decide to buy child term insurance make sure you know when the effective date of insurance is active for that newborn. Now technically when you have a baby most if not all insurance will be effective at the moment of birth as long as you enroll them in your plan within the thirty days after birth (life changing event it’s called) Unfortunately, my son died the same day he was born and afew weeks later i remembered i had insurance for my children. I called to ask about it and was told buy the insurance company that there is a 14 day clause for newborn births. He had to be at least 14 days old to recieve the benifit. I just suggest if you opt to get insurance that you ask alot of questions because this is something i pay for but was never told about nor stated in my plan policy. In all fairness why would I know or think to ask about it because I would have never thought this would happen to me. This is something every parent fears and hopes never happens. To be honest I think the clause is offensive when you think about it from the point of view of a parent,my baby was no less in value if he was 1 minute old or 25 years old. What if your baby was 10,11,12,or 13 days old, does he/she not deserve the same right to be treated the same. At the end of the day I just wanted to provide a nice going home service for him without the stress of lack of finances. Insurance companies always try to find a way not to pay.

    • Mika,

      First and foremost, I am sorry for your loss. I couldn’t imagine the pain and frustration you are feeling.

      That being said the reason they probably use the 14 day clause is because the company has the data showing that the first 14 days are the most delicate and thus not priced into the product.

  18. I would have to say that there are still many missing elements.

    -if you start a family late in life ie mid to late 30s you are going to have to buy additional term in your early 60s or 50s and it will cost you quite a bit.
    -if you buy for your children early in life you can borrow against it for college in addition, if you have girls and they marry an idiot they will have something to fall back on
    -it is a great investment if you have maxed out your other qualified and non qualified plans
    -borrow against and pay yourself back how can you go wrong
    -When you are retiring you cant take out huge sums out of your 401k or you will get taxed highly but if you have a large whole life policy you can have extra money that you would not normally have
    and all you have to do is pay yourself back.
    -if you stick with a firm like northwesterm mutual you will do great.

    • I am not sure why the plug for NorthWest Mutual and what the marrying an idiot has to do with the convo lol but your other points are great

  19. Different people have different opinions on child life insurance and the need to purchase it for non-income generating sections of society.
    Many people buy life insurance for their kids to offset funeral costs that would be incurred if a tragedy was to fall upon them. As unpleasant as the thought of your kid dying is, it is a practical decision many couples make because funerals tend to be extremely expensive and they don’t want to go through the financial struggle of arranging for their little one’s final rites when they are already going through an emotional turmoil.
    Whether you should buy life insurance for your child or not really depends on your comfort and financial circumstances.

    Denise

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