Buying a whole life insurance policy for your children seems like a good idea. It acts as a savings account that you create for them so that one day they can use and utilize the cash value in the insurance. But there are several logistical obstacles to youth insurance that you need to understand before jumping into a new comprehensive policy for your children.
Do you need life insurance for your children?
I would like to take a moment to consider buying life insurance for your children who have nothing to do with youth insurance. Some people ask aptly, do you really need life insurance for your children? After all, they do not normally provide income for the family. So what is the purpose of life insurance?
This is a reasonable question and one that you really should keep in mind if you are taking out life insurance on your children. This is an important aspect of one of the biggest obstacles I come across when it comes to buying life insurance with children when cash value accumulation is the goal. But for now, let's simply discuss the appropriateness of any death benefits at all for a child.
For the most part, no, you do not need life insurance on a child as long as you do not lose family income per se if they die. But losing a child is a mighty challenging moment in one's life. It is an event that is usually followed by a lubrication process that can last an extremely long time and even permanently change your outlook on life. Life insurance for a child has nothing to do with recovering income lost from the child (unless you happen to be the parent of a very successful child actor). However, it provides the necessary means to process enormous pain should such an unthinkable event take place. Simply put, if your child dies, you will need some time off work to deal with the emotional charge, and a little life insurance can certainly buy you this time.
Thinking of slightly less dark scenarios, youth life insurance policies also ensure at least some life insurance if your child develops some form of health problems that make it difficult to apply for life insurance later in life (more on this later also when we get into the obstacles i mentioned above about cash focused life
The problem of buying cash value Life insurance on your children
There are a few different reasons why people apply for a cash value life insurance on their children. children) . In my experience, they are due to the following:
- They understand that younger people pay lower insurance premiums, so they assume that children must get the best deal.
- They want to save money on behalf of their child and thought life insurance. was an excellent alternative given its safety in principle.
- They want to save for college and thought this was the way people do it with life insurance.
- They fell in love with something like Infinite Banking® and want to ensure their child learns it too, so buying a policy on him / her is the way they thought was best to teach them.
Although I have categorized primary motifs, there is often an overlap between the categories.
Although these motives are truly noble and well-meaning, many of them have subtle – but extremely important – obstacles that can often derail the intended strategy.
Children do not receive lower insurance interest rates 19659003] Most of us come to the bottom and that insurance costs are correlated with age. This is most – but not entirely – true. The correlation is actually with the empirically observed probability of death, which generally increases with age. Funny fact, men have a higher probability of death through the 20s than in most of the 30s. However, life insurers do not charge 20 men more for life insurance than 30 anything. Instead, they use different curvature adjustments of costs that ultimately result in most men in their 20s paying more per life insurance unit relative to age than men buying in their 30s – that does not necessarily mean they pay more absolutely than 30 year old men.
While children generally have a lower probability of death than someone in their 70s, it is a risky business for a life insurer to issue a full life or a general life insurance policy. There is a lot about the child's health that is completely unknown. The life insurer must price life insurance appropriately to deal with the possibility that the child may develop a disease that shortens life expectancy in adolescence, 20s, etc. Life insurance companies use invoicing to report this and this practice can definitely weigh on how well the policy accumulates cash value.
Take the following example, let's say a 35-year-old father wants to buy a $ 10,000 premium policy with a design that maximizes cash. If the father is the insured, here is an account of estimated values for his policy:
 Now the book about his newborn son instead is the insured:
Message that the cash values at the start are almost identical, but the death benefits with each insurance is very different. This is due to the minimum required death benefit required to avoid breach of the Modified Endowment Contract.
Now look at the cash values in 20. Policy where the father (who is 35 years older ) has more cash value than the insurance where the son is insured. And again, these would mean that you have to spend for these processes.
Practically, I should also mention that the possibility of obtaining youth policy through insurance is almost non-existent. Justifying a $ 1.2 million death benefit at launch will take an incredibly unique set of circumstances that are unlikely to exist.
College Planning Should not insure the adult child
Life insurance as a tool to save for college has high strategic value largely because of its ability to help the parent accumulate more wealth versus more traditional methods (if you are interested in a detailed discussion of this, we discuss it in Predictable Gains ).
But many people look wrong to insure the child for whom they plan to save money. I understand the association problem that people make here, but let me give you my thoughts on why this leaves you very strategically vulnerable.
When the child is insured and the parent pays the premium, there is a serious risk of failure in the plan should the parent die. Parental death leaves someone who needs to continue paying premiums, and that may be impossible at that time.
When the parent is the insured, the parents' death benefit means automatically creating means to afford college without future premium claims. If you are interested in more information on how life insurance works as a university planning tool, here is a video we created on the subject:
The whole life insurance is an okay way to save money on behalf of your child, but it is limited in terms of the actual capacity it has when the adult is insured. As long as you are okay with these restrictions, you can really use it for a young insured.
But small life insurance policies for children do much more to provide grief if a child dies young and it is a much better way to distribute valuable resources.
Youth policies are limited in terms of allowable premiums and entail additional costs that adult policies can generally avoid, this reduces the return on youth policies. So if you want to optimize the return on premiums, it is best to insure your own life instead of your child in a whole life policy.