The Debate Continues About Insuring Kids

Back in my college days Consumer Reports was essential reading.

If you wanted to be socially aware, and patronize socially responsible companies, you read it.

If you wanted to get good value for your money on every purchase, you read it.

I am glad to see they are still around.

Their website is particularly interesting. Feature author Karin Price Muller has written a very savvy article on life insurance.

I recommend it because she touches a lot of bases in a way that is fun to read and informative (beware the satirical video at the end).

One issue she addresses is about life insurance on children. Here is what she said, along with my response. Tell me what you think:

15. Your kids — unless they’re the breadwinners in your family — don’t need life insurance.

And yes, they’re even marketed in those freebie diaper bags you get when you deliver a child in a hospital. Case in point: My late dad bought me a whole life policy with a $50,000 death benefit when I was 10. It wasn’t because he wanted a payoff when I was dead, but he was thinking in terms of a long-term investment for me (while trying to help out a friend with a new insurance sales job). Today, the cash value part of the policy is worth $16,000, so I could take that money out now. Or, my beneficiaries would get a total of $66,000 when I die. But, rather than paying the $340 annual premium, my dad could have invested the premiums in a mutual fund earning 8%, and over 33 years, it would have been be worth $53,593 (Thanks to the SEC’s compound interest calculator for help with the math.)

So while the insurance policy would do slightly better for my heirs, the investment would be have been better for me during my lifetime. Something to think about before you buy a policy for a kid.

My comment: Maybe, maybe not. Life insurance contracts can have very strong guarantees. A more fair comparison would be between the guaranteed account value life of insurance vs. any other guaranteed investment you can identify.

Also: don’t forget the importance of securing the insurability of your children. Let’s suppose they unfortunately develop a medical condition in adulthood that would make purchasing life insurance impossible or very expensive. Some examples would be diabetes, cancer, and any number of neurological disorders. Or, let’s suppose they take on some higher risks in their lifestyle. These could include an adventurous hobby such as scuba diving or mountain climbing, or perhaps a job that requires them to travel to remote places in Asia.

If they enter adulthood with a policy already in force, then they will have avoided the problem of not being able to buy the life insurance they need.