Life insurance is something that is vital for every adult, and some children. Life insurance provides a death benefit when one is needed most, when someone has died. There are multiple types of life insurance including term, universal life and whole life. Within those broad categories there are certain subsets like annual renewable term insurance, variable universal life insurance, indexed universal life insurance, blended whole life insurance etc. I try to help people understand how much and what kind they might need to research.
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:
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 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