Life insurance is a pillar of a strong financial foundation, essential in our personal finances. However, there is one thing about it that I am not too fond of because I see little merit or practicality to it -- life insurance for kids.
In this post, let's talk about the pros and cons of buying life insurance for your children. But before we dive into this topic, I want to review life insurance a little bit.
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What is Life Insurance?
Investopedia said life insurance is a guaranteed contract between an insurer and the policyholder. However, the contract will only take effect if the policyholder dies, hence the 'life' in the policy name. If this happens, the insurer will pay the policyholder's beneficiaries.
So, based on this definition, life insurance makes sense if the policyholder has dependents, which is unlikely if you buy it for your toddlers or babies.
Nevertheless, we also need to recognize that there are advantages and disadvantages in buying life insurance for your children, but you're more likely not to be happy with the main "benefit" of purchasing life insurance for kids.
Advantages of buying life insurance for kids
There are advantages to buying life insurance for kids. However, it's still up to the parents or guardians to decide if the following benefits make sense.
1. Financial Protection
Let's get straight to the meat of why I don't like hearing insurance agents talk about why little kids should have life insurance.
A life insurance policy will only take effect when the policyholder dies, in this case, the child. When this happens, the beneficiaries, most likely the parents, will receive a payout for the death benefit that can be used for funeral expenses and related costs.
2. Virtually Guaranteed Insurability
Since the life insurance policyholder is a child, they are likely to be in good health with no existing medical conditions, and their insurability is almost guaranteed, unlike their older counterparts.
Since they are also insured at a younger age, any health issues they may develop later in life will not disqualify them from their life insurance.
3. Lower Premiums
Insurance policy premiums increase as we age, so younger children will only require a lower premium to pay than older children and adults.
4. Cash Value
This applies to VULs or variable universal life insurance, a combination of life insurance and investment. In the Philippines, VULs are the common insurance products sold in the market.
This investment will also grow, especially those invested in high-risk, high-potential return investments. This cash value can soon also be withdrawn to pay for financial milestones, like paying for college tuition or starting a business.
Disadvantages of Buying Life Insurance For Kids
Now that we've discussed the advantages of buying life insurance for kids, let us examine its disadvantages.
1. Unnecessary expense since kids have no dependents.
The main purpose of life insurance is to protect our loved ones financially in case we die unexpectedly. However, this is not the case for children.
Children don't have dependents relying on them to provide, and they are also less likely to be taken out of the picture. If that's the case, life insurance for kids will not make sense.
2. Long-term financial commitment.
Buying a life insurance policy for your child means you'll need to pay their premiums until it matures or is canceled.
So, you'll have to continuously pay monthly to maintain the benefits of life insurance that, honestly, won't be used any time soon.
3. Low rate of return.
VULs are what's usually sold to parents for their children because it has an investment component. However, if you're buying a VUL for your child based on its cash return, then you're missing out.
4. Premium can be used for other financial goals.
Monthly premiums are expensive, especially if you're buying for a child, and the coverage may also not be enough for a child once they become adults.
So, instead of paying for a child's life insurance, it could be used to increase your (as parents) coverage, increase your emergency fund, pay off debt, or invest it.
Verdict: Should You Buy Life Insurance for Kids?
No. Buying life insurance for your kids is a waste of money, mainly because little kids don't have dependents, and they are less likely to die than their parents.
Instead, you can use your life insurance fund to:
- Increase your life insurance coverage.
- Buy health insurance instead of life insurance.
- Add to your emergency fund.
- Invest in their educational fund.
- Pay off existing debt, if any.
Hopefully, this post can help parents decide whether to buy life insurance for their kids. Don't let commission-hungry insurance agents guilt-trip you into buying life insurance for your child they don't need.