Child life insurance - Is it just a form of investment?

Submitted by mega on Wed, 02/06/2008 - 14:00

I was reading an article this morning about life insurance and kids and was wondering what the community take on this is. The article is of the opinion that child life insurance is not a good investment on kids but I have heard others say it was a good idea. Is it a waste of money. Would the money you spend be better invested elsewhere?

Here is a quote from the author of this article on yahoo:

Question: I received an offer in the mail to buy a life insurance policy for my 18-month old daughter for a small monthly premium. As I understand it, the policy would not only build cash value, but double the amount of insurance coverage when my daughter turns 21. Do you think this is a good plan to build for my daughter's financial future or is there a better way?
-- R.K.

Answer: Let me put it this way. I think almost anything you would do with your money, outside of buying lottery tickets or playing the ponies, would be better than sinking it into a life insurance policy for your daughter.

Posted: 06 Feb 2008 02:13 Post Subject:

It depends on your motivation..We have Child life insurance policys on our kids, and have since they were about two years old, and are currently looking/researching ones for the grandbabies, but in no way am I doing it as an 'investment'....my thoughts have always been that "God forbid" something horrible happens to one of them, the last thing I want to concern myself with was/is coming up with 6-8-10k to bury them.

There are some good threads around about this....it's very complicated (to me) trying to decide the best product.

Posted: 07 Feb 2008 01:44 Post Subject:

I find the article a little disturbing, I understand that the author does not want to buy a junk policy for his daughter, but I don't think it should be put the way the author put it. I don't know if he meant to come across this way.

Posted: 07 Feb 2008 02:13 Post Subject:

Just for the record I had child life insurance as a teen. My parents were just being safe. It may have a bit of a stigma to it but don't the stereotypes stop you. Unfortunately, I know many young friends that died to early.

Posted: 07 Feb 2008 10:43 Post Subject:

I find the article a little disturbing, I understand that the author does not want to buy a junk policy for his daughter, but I don't think it should be put the way the author put it. I don't know if he meant to come across this way.

August (just curious) what do you find disturbing? I think the ''answer'' is well uninformed and frankly ridiculous at best..especially this

would be better than sinking it into a life insurance policy for your daughter

but I'm not getting you on the disturbing part....(not argueing with you at all, just curious).

Posted: 08 Feb 2008 04:00 Post Subject:

Do you really consider life insurance an investment, or protection?

The benefits of child life insurance plans are:
1. Guaranteed insurability as an adult.
2. Possibility of getting increased life insurance limits as an adult.
3. Life insurance coverage in the future no matter what your child's health status or if they join the military.
4. Also, there is a cash value that may build up within the plan.

The main benefits for your child are the future advantages of have life insurance protection.

Posted: 08 Feb 2008 11:52 Post Subject:

Hey there Mega. Since there seems to be a genuine thirst for knowledge in this area, I'm going to submit a couple pages from my new book, Honesty is The Best Policy. These have to do with insuring our children.
I hope it helps,
Mark

To Insure or Not To Insure?
That Is the Question

Child life insurance is usually purchased on impulse – kind of like the National Enquirer, a pack of gum, or candy bar at the supermarket check-out counter. Like so many other spontaneous purchases, buying a life insurance policy for your child might seem like a good idea at the time. However, once you sit down and think about it, it doesn't always make sense. As a matter of fact, if you ever want to start a heated argument, ask a room full of financial experts about purchasing life insurance on the kids.
Realistically, unless a child is earning a huge weekly allowance, his family's income isn't going to be greatly reduced if he dies. On the contrary, in the extremely unlikely event that a child suffers an untimely death, it's the family's expenses that will drop substantially – not necessarily their income. Unless the youngster is a child-celebrity, sports icon, or teen genius, some might consider that insuring his life would be a waste of money. Money that would probably be better spent buying additional coverage on mom and dad.
Unfortunately, most people aren't as knowledgeable as they should be when it comes to life insurance. In fact, according to Limra International, a research firm sponsored by the life insurance industry, almost 30 percent of the permanent (whole life and its ilk) policies sold in the U.S. every year insure children under the age of 18.
So why do so many parents buy life insurance policies for their children? I believe that it's mostly due to the fact that new parents are always very receptive to the idea of spending a little extra money to protect their children, and that's what they think they're doing. Agents know this and usually encounter very little (if any) resistance when asking for the sale. The insurance companies know this and love the idea that there is very little chance they will ever have to pay a claim on a child's policy.
Whether or not you should purchase a life insurance policy for little Johnny is definitely not something that should be decided while waiting for the coffee to perk. Even though these policies are typically for very small amounts of coverage and are usually offered as a last-minute add-on to a much larger policy the parent has already decided to buy for himself, the decision to cover a child should not be something “thrown together” at the last minute.
This is a decision that has to be made by responsible parents who have considered every single aspect of the “global plan” they have for their children. First consider that life insurance on a child is very inexpensive. A policy purchased early in life is significantly cheaper than one purchased when grown. It is true that securing coverage early in life will guarantee them some form of coverage for the rest of their lives but, whether or not this is a good idea has to be something you've thought about and is somehow woven into that master plan.



One of the most commonly used sales pitches is that life insurance on kids is a great way to guarantee that little Billy will always have a policy, even if he later develops a disease so serious that he doesn't qualify for coverage. This claim isn't exactly false, just much less impressive than it sounds. According to Limra International, only about 5 percent of all life insurance applicants are ever flatly denied any type of life insurance. Thus, even if your child develops health problems later in life, it's not likely that he'll become totally uninsurable. Although purchasing a life insurance policy on a child in order to guarantee future insurability might not be the worst of all ideas, the money might be much better spent on another part of that well-thought master plan.
Another one of the more famous, maybe even infamous, sales pitches used is that life insurance is a tax-deferred investment that will help pay for little Billy's higher education. When he enters college, it is claimed, you can borrow tax free an amount equal to the policy's cash value, never be required to repay the loan or increase the premium, and the policy will continue to insure little Billy for the rest of his life. As long as he doesn't live much past adolescence, this plan should work just fine.
Back in the mid-90s, I investigated a number of cases in which new mothers were specifically targeted for life insurance policies to be used as college savings funds. Agents, after having either read about the new mothers in the local newspapers or purchasing their names from sort of “service” were promised huge amounts of money when their newborns were ready to start college. In one case I remember quite well; a new mother was told that if she were to deposit only $28 per month into a college fund/whole life insurance policy on her 4-month old, the plan would pay just a little more than $30,000 when her son started college in only 18 years.
Now, I realize how ridiculous this sounds and how something like this could have been attributed to some sort of post-partum condition, a simple misunderstanding, a mother whose memory failed due to stress, or any number of other reasons. As a matter of fact, in cases like this, some insurance agents have a saying that professes that “buyers are liars.” After locating 17 additional cases of whatever condition these women supposedly shared, and positively ruling out the “rogue agent” defense, I did a bit of “consulting” for the insurance company. In the end, the insurance company saved a huge amount of money in legal fees, the possible embarrassment of network media exposure, and all the new mothers were remunerated. I love it when a plan comes together.
I have also investigated cases in which agents somehow got the cash value and paid-up insurance values confused. In these cases, the new mothers would supposedly have the ability to use the accumulation fund/cash value to offset future premiums and could withdraw money from the “paid-up insurance fund” to send their children to college. For the record; the paid-up insurance column often found on permanent life insurance illustrations is not a fund from which money can be taken.
These are only a couple examples of sales pitches that don't work yet have been used rather extensively. For a child's college education, the no interest loans, low interest loans, loans taken against the death benefit, partial withdrawals, partial surrenders, etc., usually don't work and are just used to sell you a policy. The truth is that while life insurance is tax-advantaged, it isn't a good investment when compared to alternatives like 529 or Pre-Paid Tuition plans, Coverdell Education Savings Account (formerly known as Educational IRAs), Uniform Transfers to Minors, The Hope Credit, certain grants, and even some low interest loans. For more information on any of these, contact your financial advisor or the IRS website.
Different types of Variable Life Insurance policies are sometimes compared these funds. Life insurance, however, generally costs more. There is an upfront sales commission that's much higher than the sales charge on load or no-load investment funds. Annual investment management fees and of course, annual charges for insurance on the child's life also affect the total cost. Unlike contributions to some college savings plans, the premiums are not deductible and withdrawals from life policies will reduce the death benefit. If you withdraw more money than the premiums you paid into the policy, you will pay income taxes on the difference and the premiums on a life insurance policy will eat into the gains you could make from the money you are paying.
These expenses leave less money to go into the policy's tax-deferred accumulation fund. As a result, you must usually pay into a good cash value policy for 15 - 20 years before it begins to earn more than a comparable tax-advantaged investment. That generally makes it unsuitable as a college investment plan.
The bottom line: Unless it is part of a well-thought master plan, life insurance is for adults. As a parent, you need a policy that will cover the cost of raising your kids if you die prematurely. You work every day to provide for them, make sure they live well, and have the things they mostly want (and deserve). You work to put shoes on their feet and a roof over their heads. Use life insurance as a tool to make sure they always live well.

Posted: 09 Feb 2008 12:34 Post Subject:

Wow InsInvestigator,

It sure is good to hear from you and I know it's your birthday, but I just wish you had hit us in segments.

Let's see . . .

Life insurance on children is usually purchased on impulse – kind of like the National Enquirer, a pack of gum, or candy bar at the supermarket check-out counter.



I would have to strongly disagree on this point. People normally buy life insurance on children because children die. I know that personally, after having lost a grandson.

Unfortunately, most people aren't as knowledgeable as they should be when it comes to life insurance.



Couldn't agree more here. Most people don't understand that insurance is the one and only way to create an instant estate in whatever amount the person chooses. Nothing else will do it, short of winning the lottery.

A policy purchased early in life is significantly cheaper than one purchased when grown. It is true that securing coverage early in life will guarantee them some form of coverage for the rest of their lives but, whether or not this is a good idea has to be something you've thought about and is somehow woven into that master plan.



I don't quite understand your "master plan" theory. I have five $10,000 life insurance policies that my Mom purchased on me when I was born and now they are in my safe, totally paid up, and one day my wife or children will definitely receive $50,000 and it didn't cost me a dime.

One of the most commonly used sales pitches is that life insurance on kids is a great way to guarantee that little Billy will always have a policy, even if he later develops a disease so serious that he doesn't qualify for coverage.



This is not only a sales "pitch", it's the honest truth. Hopefully, one day "little Billy" will be grown, with a wife, 2 kids, 2 cars, a mortgage, a lot of credit card debt, etc. If now "big Billy" develops heart disease, the life insurance policy that Mom bought on him will still be in force at the same premium as when he was 5. I just don't understand how you could dispute that.

Another one of the more famous, maybe even infamous, sales pitches used is that life insurance is a tax-deferred investment that will help pay for little Billy's higher education.



First of all, life insurance is not an investment and should never, under any circumstances, be purchased for the cash value/accumulation alone.
So, you are right on target here.

Use life insurance as a tool to make sure they always live well.



Exactly, even if they are unable to purchase life insurance at the age of 25.

This was an excellent post and I want a copy of your book.

Happy Birthday, again!

Maze

Posted: 09 Feb 2008 02:16 Post Subject: Excellent Responses!

I must say this topic about Child life insurance had gotten away from me during this move and all. With Kay and I trying to get everything set up here and then the tornado, getting started back to work and all I have missed a few days here on the forum but must say this is the type of discussions that I think any new member or visitor would find very interesting and perhaps prompt them to join in.

Excellent post InsInvestigator and thank you for sharing some of the book with us here on this topic and nice to see so many personal opinions about this also.

Excellent :D

Posted: 09 Feb 2008 03:22 Post Subject:

In most cases, a large amount of coverage is not desirable. Assuming good health, a group plan may become available along with the opportunity to purchase coverage at a favorable rate.

The key is that there is no fit-all solution. Consult your local broker, but insist that he/she has a minimum of 10 years experience specializing in financial planning.

Posted: 09 Feb 2008 11:59 Post Subject:

Terrific posts guys (maze and ins invest. in particular!) Ins inv. I'm with maze on this Quote:

Life insurance on children is usually purchased on impulse – kind of like the National Enquirer, a pack of gum, or candy bar at the supermarket check-out counter.
I would have to strongly disagree on this point. People normally buy life insurance on children because children die. I know that personally, after having lost a grandson.



I think buying Child life insurance is rarely a whim...now not researching properly oh yeah....I think though that the majority of people take this very very seriously and put great thought into it...I've known many people (myself when younger) that have a hard time doing this...just the mere thought of losing a child...and then to buy something that will pay you if your child dies! oh my gosh! I had one friend that bought 2k per kid when they were born (mid seventys) and would not buy more because she was determined she ''would not profit by the death of one of her children'' only wanted enough to handle the burial....I'm kind of that way too, to a degree...of course hoping/praying all the while they will carry that 25k I bought and their heirs collecting on it when they are past seventy years of age or better!

I really think people take this much more seriously than you are giving them credit for....now, if by 'impulse' you mean that they are taken in (at times) by 'horror stories'' and buy policys based on fear...yeah, ok I'm sure that does happen occasional...

Anyway thanks a bunch terrific thread!

oh,

he/she has a minimum of 10 years experience specializing in financial planning.

I think that's a little steep...I agree some experience, and certainly the backing of a respected company in good standing but golly 10 years? How could anyone get to 10 years tenure? They'd starve out long before following this logic. :wink:

Posted: 09 Feb 2008 08:01 Post Subject:

Hello everyone,
Thank you very much for the kind words, Maze. When I was asked if 44 felt any different that 43, I had to say that it didn't necessarily feel any different than 33. Just a bit more grey and a few more pounds.

You know, I've gave this chapter quite a bit of thought before putting it to paper and feel that [we] those of us with a slightly greater knowledge of actuarial probability than others, are far less likely to fall into the class of insurance consumers that this article was written for. In other words, because you and Lori have a greater knowledge of insurance than the average consumer, I am not surprised at all that you disagree with me.

Do me a favor by taking a step back and looking at this from the standpoint of the majority. If 100,000 people read this article, how many will fall into the category of those who truly understand the process of purchasing insurance for children?

Unfortunately, some of know families who've had to file a death claim on a child, and for those people I guess it was fortunate that they had a policy in place to offset the cost of the burial. Statistically speaking though,
these cases are extremely rare when compared to the number of children's policies that lapse without ever paying a claim.

Lori, when you said

just the mere thought of losing a child...and then to buy something that will pay you if your child dies! oh my gosh!


you literally spelled out the frame of mind some insurance companies (Gerber, for instance) have driven into the American insurance consumer's mind. They've literally attacked us from our weakest point - the healthy, safety, and welfare of our children.

I never bought life insurance on any of my children. If any of them had perished, I could not imagine how much this would have devastated me. I would have, however, taken $1500 - $2000 from somewhere, given them the best funeral I could have and done my best to keep the lives of their mother and my other children in some sort of order until the wounds began to heal. That's both my duty and responsibility as a father.

And that's my opinion.

Posted: 09 Feb 2008 08:18 Post Subject:

because you and Lori have a greater knowledge of insurance than the average consumer, I am not surprised at all that you disagree with me.

Only thing I disagreed about at all Mark was that I felt the purchase of child life insurance policies is rarely impulsive, or as nonchanlant as you put forth...I know for us (at the time) and many young parents even an extra twenty bucks a month was a big commitment..I'm totally on board with you just this part I didn't agree with

...Life insurance on children is usually purchased on impulse – kind of like the National Enquirer, a pack of gum, or candy bar at the supermarket check-out counter..

But you know as I read it again, I'm not sure you are saying meaning it the way I'm taking it...maybe you mean it like, not much research, effort to educate ones self about the product etc...I'm taking it like you are saying, ''gum, mints, yeah life ins on my kid, no big deal'...see?

Posted: 10 Feb 2008 12:38 Post Subject:

Hey Lori,

We are so close to being on the same page. Maze, you, me, and so many others cannot imagine purchasing insurance on anyone without giving it a great deal of thought. WE ARE THE MINORITY and thus, that article was not written for you. Most insurance on kids is sold just like this:

"Mr. and Mrs. Jones, I want to thank you for completing your applications for life insurance. Because you have taken these steps to insure each other, it really shows your love and commitment to each other and the kids."

"Oh, by the way. We also have a small plan that we can put on each of the kids for only $12.00 per month. There is no medical required and they'll each be covered for $10,000 for a long time. What if I add those to your family insurance plan as well?"

And that's all the information they get. In their minds, if they were to question the policies, they would have to concede [psychologically] that their children could die. You've already shown very clearly how we as parents would rather avoid that issue entirely.

If you were a great mechanic, you would never purchase an automobile for your children without carefully examining every part of the car. If you're like the majority; if the kid likes it and it appears to be in good shap, we write the check and send the kid down the road - because we don't know any better. Just apply that train of thought to an insurance policy.

Posted: 10 Feb 2008 01:17 Post Subject:

Ok, I get your point now....and you're right re: ins folks almost unable to see it from the stand point of zero or minimal knowledge.....I guess in my case when we bought the policys (way before I knew how to spell insurance)....we were buying only child life insurance policies and we really thought about it, (didn't research jack but thought hard on it)...to me it was almost an emotional thing...like buying it WAS admiting something could actually happen to the babies...... :(

Posted: 20 Feb 2008 05:28 Post Subject:

It's a little disturbing thinking of what COULD happen. What ifs and shouldn't ofs can turn into nightmares. My parents have had a life insurance policy on me since I was young.

I believe it was only a $20,000 policy but every bit can help.

Posted: 21 Feb 2008 01:01 Post Subject:

Good answer...

"Life insurance generally makes a lousy investment, in large part because of high fees that drag down returns. This view doesn't make me anti-insurance; quite the contrary. I believe life insurance coverage plays a crucial role in any family's financial plan.

But that role isn't to provide an investment opportunity. Rather, the reason you buy life insurance is because it's the one financial product that can replace income if a breadwinner dies, which allows surviving family members to maintain their standard of living.

But this principle rarely applies to children. After all, unless your daughter is an incredibly precocious entrepreneur or making big bucks doing commercials for disposable diapers, you're not relying on earnings from her to support your family. So while your daughter's death would obviously be a personal tragedy, it wouldn't be a financial one.

In short, it makes little sense for you to devote your money to something that doesn't make it as an investment and that provides life insurance protection for someone who doesn't require it.

So what should you be doing to give your daughter a leg up financially?

Plan for your future
Well, the single most important thing you can do is to make sure your own finances are in shape. After all, the more precarious your financial situation is, the more difficult it will be for you to give your daughter all the things I'm sure you want her to have: a good education, a nice home, a chance to experience the wider world and, perhaps most important, a sense of security and stability.

You can begin building that solid financial foundation by stashing away enough money in a money-market fund or savings account to cover about three months' worth of living expenses. This sort of reserve will allow you and your family to weather emergencies such as unexpected medical problems or financial setbacks like a layoff with minimal disruption to your lifestyle."

Posted: 15 Jun 2008 04:38 Post Subject:

Answer: Let me put it this way. I think almost anything you would do with your money, outside of buying lottery tickets or playing the ponies, would be better than sinking it into a life insurance policy for your daughter.



This person is against life insurance investment. I have the answer for this. It is good to invest on other things that can make your money grow much bigger. You can invest it on stocks, personal business, real estate or in anything, but spare even a small amount for life insurance. Life insurance investment is not for wealth accumulation. You will not earn money much money for it. But it can give what other investment cannot provide. And that is protection. Life insurance investment is all about wealth preservation. Life insurance should not be the source of your income, but it is very essential for the financial protection of the family.

Now about the question of is it good to invest on life insurance for kids, then my answer is Yes. Life insurance for kids can be considered as a forced savings for the kids' future. The cash values are built up plus it earns interest and dividends on the case of participating plans. Money placed here can serve as an emergency money in the future. It can be surrendered if the child needs money for school. Or it can be a lifetime protection if he or she has his or her family in the future. I am not telling you to invest all your money in life insurance. Invest on other forms of investment that can give you greater return, but never disregard life insurance investment.

It is really good to start on an early age. The premium is low and the interest accumulation would be higher because of the time value of money put into the life insurance policy.

Just a simple reminder: Life insurance is a product that you can buy when you don't need it, but cannot be bought when you needed it most.

Posted: 16 Jun 2008 09:56 Post Subject:

Joven222: Do me a huge favor; NEVER use the terms "life insurance" and "investment" in the same sentence. In most states, there are specific insurance codes which clearly dictate the differences between those two products.

If you are an agent licensed to sell life insurance in America, trust me, the last thing you want to be part of is an investigation into the possible misrepresentation of life insurance products you've sold and the terms you may have used to do so.

Posted: 17 Jun 2008 03:21 Post Subject:

Oh, sorry I don't know about that. I am from the Philippines and we treat life insurance as one kind of investment.

the last thing you want to be part of is an investigation into the possible misrepresentation of life insurance products you've sold and the terms you may have used to do so.



This is really interesting. Can you explain more about that. It really gets my interest. ;) You don't treat life insurance as an investment? Why is it that there would be a possible misrepresentation of life insurance products. I am interested on the laws you have their about life insurance selling.

Thanks in advance.

Posted: 18 Jun 2008 09:04 Post Subject:

Hello Joven222,
Unfortunately, there isn't any sort of boiler-plate answer when it comes to using life insurance an investment. A clear benefit of insurance products is the tax-deferred treatment of the cash accumulation part of the policy. Of course, the higher your tax bracket and the longer you have until retirement, the more valuable this benefit can be. However, a very important disadvantage of using life insurance as an investment is the high fees and expenses that make it difficult to compete with the returns of even ordinary security instruments, such as mutual funds.

Posted: 31 Jul 2008 04:28 Post Subject:

I am of the view that protection comes first before investment.

Life is full of uncertainties and it is important we have some form of assurance in life so that we can manage crisis more effectively. Insurance provides sum assured upon occurrence of specified events such as death, disablement, crtical illness etc.

I also believe at some point in time, insurance may not be an option but a requirement especially when we borrow loan to purchase properties we need insurance as collateral.

If that is the case, it makes logical sense to get kids life insurance. In fact the best time to insure is always before a person gets older and as a person gets older, generally he/she is prone to sicknesses. Normally kids have advantages in terms of their age and health conditions when applying for life insurance.

When addressing protection needs and investment needs, protection needs should be a more important priority.

Posted: 31 Jul 2008 01:14 Post Subject:

Normally kids have advantages in terms of their age and health conditions when applying for life insurance.

Very true indeed!!!
That is one good reason why you should have life insurance for your kids.
Apart from that we need to introspect & extract some hidden facts in line with today's fast-paced world.
If we are investing on educational policies keeping the future expenses in mind...don't we need to teach them that their lives are valuable & that they should start saving in bits-n-pieces! I believe that should come before the other things.. :)

Posted: 31 Jul 2008 03:38 Post Subject:

in my opinion, i think the money is better spent if it is put into a college savings account. this is an investment in their future. i don't believe in using life insurance plans as an investment. i think a college plan is money better spent and saved.

my father bought me a solid life insurance plan when i was in my early 20s. he paid the premium on it for several years and then when i got married i took it over. the premium is still low and it is a gift that he did that for me at such a young age. i will do it for my kids when they get to that point as well. but in the meantime, i'm growing their college savings and looking forward to a long life with them filled with joy. i tihnk that the last thing i'm going to be interested in if something were to happen to my kids would be the amount of money i'd get out of their policies.

Posted: 01 Aug 2008 12:20 Post Subject:

i tihnk that the last thing i'm going to be interested in if something were to happen to my kids would be the amount of money i'd get out of their policies

Of course you wouldn't be interested in that, and I understand what you are saying...Here is what I did with the kids and the grandkids....My fear was/is God forbid something happen to any of them the last thing in the world I wanted to deal with was not having the money to take care of the arrangements...for that reason I had (have) modest policys on all of them about 20k I think on the kids, and maybe 25k on the grandkids (it was cheaper) actually my kids might be only 15k I honestly don't recall...anyway that was my logic...

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