The Simple Way to Plan, Manage, and Organize Your Money
June 16, 2010
Should You Carry Life Insurance on Your Kids?
There are a few reasons why carrying life insurance on your kids can make sense. Among these are (1) inability to afford a proper funeral should they pre-decease you, (2) desire to preserve your child's insurability, or (3) desire to 'set them up for life'. In this post, we'll answer the question and as you will see, much depends on your financial circumstances.
It is a terrible, terrible thing when a child dies at a young age. Beyond the emotional toll that lasts a lifetime, there is also a financial ingredient as very few of us have a plan to pay for the funeral of a child. Often, memorial funds are setup at banks so family, friends, and the community can help pay for these expenses, but there is no guarantee that these contributions will match the high costs of a funeral.
For this reason, it is a good idea to purchase some form of life insurance on your children. The chances of this kind of tragedy striking are incredibly low, and consequently, insurance premiums are very inexpensive. Generally speaking, a policy can be had for only a couple of dollars per month through group life insurance from an employer or as a rider (add-on) to an individual life insurance policy. Either way, it's worth investing a few dollars a month to make sure you're covered if you don't have the money availble to pay these expenses.
Many of us have family medical histories that will make it difficult for our children to obtain life insurance when they need it. To remedy this problem, a permanent life insurance policy can be purchased for a child that will (1) guarantee coverage, (2) lock in premium rates, and (3) increase the death benefit to keep pace with inflation. In short, even with a poor family medical
history, insurance can be procured to assure them of coverage later in life.
'Setting Them Up for Life'
If you are wealthy and want to help your kids become wealthy too, a max-funded permanent life insurance policy can be used to accomplish your goals. With a permanent life insurance policy, you'll give your kids a great deal of financial flexibility that will allow them to take out a loan at favorable interest rates, preserve their insurability, and provide an asset that could be used in starting a business, going to college, or even retiring comfortably.
NOTE: We typically do not find this last reason attractive as it often backfires with children living 'soft' lives and squandering these funds more often than not. Research suggests money given is far less valuable than money earned.
Of the three main reasons why you should buy life insurance on your child, the first is the most common. The simple fact is that most of us don't have sufficient money set aside to cover the cost of a child's funeral. Beyond that, special cases such as preserving insurability or setting up a child for life can be valid reasons, but are much less common. The bottom line is you should always carry insurance for large losses that you otherwise cannot afford. In this instance, it's a few dollars each month to offset a risk that can be upwards of $10,000.
- Having a child pre-decease you is one of the worst things that can ever happen to a person. What are the indirect costs associated with this type of event?
- Strictly from a financial perspective, what does a funeral cost? What about any final medical bills?
- Is it worth a few dollars each month to insurance against the financial costs of this type of tragedy?
- What is the opportunity cost of buying this kind of insurance? How many hamburgers, fries, or soft drinks does it equate to?