There is a great deal of confusing information out there about the advisability of buying life insurance for a newborn or young child and I’m going to try to help dispel it here by giving you a full rundown of the pros and cons so you can make the best decision possible for your family.
Let’s start with the reasons this might make sense. A policy on your child with you as the beneficiary allows you to cover your child’s funeral expenses and the time you might want to take off work to mourn your child should such a terrible thing happen. Unlike with adults, children don’t have to take a medical exam (at most, you might be asked a few health questions on the insurance application) and the child receives the valuable benefit of guaranteed insurability, meaning they can’t be turned down for insurance coverage, if they were to develop a health condition later in life (say the family has a history of diabetes). Insurance is never cheaper than when it is taken out on a newborn and usually, since it will probably be something called a whole life policy, the premiums won’t increase as the individual insured gets older. That means you effectively get to lock in a low rate which is a real boon to you and the child.
Now let’s talk about the downsides. The chance of a child dying are very low. Life insurance is meant to protect your family from risk should an individual upon whom you all are financially dependent passes. The vast majority of the time, a child does not bring income into the home and so the need for insurance on a child is way down on the bottom of the list of priorities. There are a few circumstances where this could look different as reported in a 2023 article on nerdwallet.com. The first is if your child is a model, actor or social media star who brings substantial income into the family unit. Another reason might be that your teen is working and contributing earned funds to running the household and the household is dependent on this extra money. The last circumstance is that an older child cares for the younger children in the household or performs other important services to the family that would need to be outsourced to a paid person should that child no longer be in the equation. Unless any of these conditions exist, it might make a whole lot more sense to put the funds you might spend on insurance premiums into a 529 College Savings Plan or another type of investment account with the child as the beneficiary when they become a legal adult. According to a 2023 article in Forbes, if you buy an average life insurance policy for a newborn, it will take 15 years to “break even”, meaning the cash value of the policy equals the premium paid in. On the other hand, if you were to invest in a 529 Plan or other brokerage account yielding 7% (the average rate of return for an account invested in stocks over the last 150 years according to Investopedia), your account will double in 7 years. Another con to buying insurance for a child is that most insurers offering such policies only agree to lower amounts of coverage: most no more than $50,000.00. Sure your child will have this until death as long as they pay the premium, but an adult is going to probably need much higher coverage limits when she or he is an adult. At that point, premiums will be much higher, they will be forced to take a medical exam (which they may not pass) and they are at risk of having a pre-existing medical condition excluded from the policy.
Do you have other questions about insurance or finance, in general? I’d love to help! Please email [email protected] or call 563-949-4705.
Securities offered through J.W. Cole Financial, Inc. (JWC). Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.