Children’s Life Insurance: Is It Worth It?

child-with-bunch-of-pennies
Life insurance for children:
is it really worth it?

The Globe and Mail wrote an interesting article exactly a year ago, in October 2011, asking “Does your child need life insurance?”

“There are usually three main reasons to buy life insurance on a child,” says Karl Simon, director of product and marketing for Equitable Life. “The first is to protect the family if the child dies. No one wants to think about their child dying, but the reality is, if the child dies it will affect the family in a horrible way that could really harm their finances.”

Tom Drake, of the _Canadian Finance Blog_, disagrees. He writes in his Insurance You Can Do Without series, which was quoted by The Globe and Mail:

“From a financial perspective, what monetary loss will you suffer if something were to happen? There is the cost of the funeral, but otherwise your financial responsibilities would be reduced from not having to provide for that dependant. If the cost of the funeral is a concern, you would likely be better off by saving yourself the cost of premiums and adding that same amount into your emergency savings.”

However, Simon reminds us that one or both parents may need to take significant time off work, especially if they have other children. The death of one child may also prevent parents from contributing to the education of their other children. “Forgetting about yourself entirely,” says Simon. “Most people say that if their child dies, they’ll deal with it, but think about the rest of your family that your providing for and how it could affect them.”

The second reason Simon lays down for buying life insurance for a child is to guarantee future insurability and make sure the child can still get insurance regardless of her health situation later in life.

“People aren’t buying life insurance on their kids, so they can get a pile of money if their child dies,” says Simon. “Generally, it’s a small amount of money, between $100,000 and $125,000, but what some companies are doing is they’re building in future guaranteed insurability. At Equitable, we have a feature called FGIO, or The Future Guaranteed Insurability Option, that’s only available to children and what that does is provide the child with up to $500,000 of guaranteed insurability in the future that they can use to by life insurance.”

Whether children need this option is another question. Drake doesn’t think so: “When it comes to protecting your child’s rates from future health issues, this would be a bit like gambling. To insure for this reason, you would probably have some concern that your child will have problems in the future. The problem is, if you know of any family history, then you have to tell the insurer and this will lead to higher premiums right from the start, and if you don’t tell them, they could deny your claim.”

But then again, at Equitable Life, a participating whole life insurance policy will only cost a male at age zero $1,000 a year for $80,000 in guaranteed face amount, and for an extra $50, you can get the Future Guaranteed Insurability Option, which gives your child the extra $500,000 towards future insurance at a very low price. The child or parent can pay for the policy until age 100, or just pay for 20 years before it’s fully paid up. The plan is extremely popular at Equitable Life, and it’s one of the reasons 40 per cent of their policies are sold to juveniles.

The third reason to consider children’s life insurance is that if you buy your child a participating whole life insurance policy, the policy provides the child with cash value that they can use towards their future. “It makes a great gift from either a parent or a grandparent for a newborn child,” says Simon. “The cash value will grow and the child will be able to access that cash value in the future if they ever need to.” Some people will use these cash values for education, a car, a house, or starting their own family.

With all these benefits, Simons sees only one drawback that may not make life insurance for a child worth it to some families. “Let’s say you want to buy that policy for $1,000 a year, but after five years, you say, ‘I need that money,’ and it would be gone. Plus, the cash value after five years isn’t very much because the cash values start slow and they build up over time. The main consideration would be that if you’re not sure that you can really afford it, then you probably shouldn’t buy it. You have to be pretty confident that you’re going to be there to pay the premiums for the 20 years.”

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