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

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PostPosted: Wed Feb 06, 2008 2:00 pm   Post subject: Child life insurance - Is it just a form of investment?  

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:



Quote:
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.


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PostPosted: Wed Feb 06, 2008 2:13 pm   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.



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PostPosted: Thu Feb 07, 2008 1:44 am   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.

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PostPosted: Thu Feb 07, 2008 2:13 am   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.

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PostPosted: Thu Feb 07, 2008 10:43 am   Post subject:   

Quote:
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
Quote:
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).


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PostPosted: Fri Feb 08, 2008 4:00 pm   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.



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PostPosted: Fri Feb 08, 2008 11:52 pm   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.



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PostPosted: Sat Feb 09, 2008 12:34 am   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 . . .



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.



Quote:
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.



Quote:
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.



Quote:
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.



Quote:
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.



Quote:
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


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PostPosted: Sat Feb 09, 2008 2:16 am   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 Very Happy



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PostPosted: Sat Feb 09, 2008 3:22 am   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.

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PostPosted: Sat Feb 09, 2008 11:59 am   Post subject:   

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

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,
Quote:
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


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PostPosted: Sat Feb 09, 2008 8:01 pm   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

Quote:
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.


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PostPosted: Sat Feb 09, 2008 8:18 pm   Post subject:   

Quote:
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
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..
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?


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PostPosted: Sun Feb 10, 2008 12:38 am   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.



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PostPosted: Sun Feb 10, 2008 1:17 pm   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...... Sad



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