Q. Lately we are constantly seeing commercials and receiving mailings from the same company. They are encouraging parents to buy life insurance for their young children. The ads are from a reputable company. As with all life insurance, the younger the child, the less it costs. We can buy a whole life policy with a $10,000 death benefit for only $5.83/month for our 6-month-old son. As long as we pay the premiums, the policy remains in place, and when our son reaches the age of 18, the death benefit doubles to $20,000. The premium is also guaranteed not to increase over his lifetime. This ensures that our child will always have life insurance regardless of any unforeseen future health issues and in the horrible event of premature death funeral expenses will be covered. The same company sells what they call investment-oriented whole life for adults. We have some inexpensive coverage through work but are considering buying policies on ourselves, too. Its our understanding that these can build up cash value to help with future education and retirement needs. The child insurance makes sense to us, and its certainly affordable, but do you recommend this type of plan? What about the insurance on ourselves?
A. First the child insurance. I dont recommend this particular plan or other types of child life insurance. In general, I view life insurance as an income replacement vehicle for young couples, and it is very important when you have small children. Since most children dont contribute any income to meet the family expenses (unless they happen to be like the Gerber baby), you dont need to insure their lives. If they become uninsurable, $10,000 or $20,000 isnt going to provide much support to any of their future dependents. If the horrific happens and your child dies at a young age, the cost of a funeral is nothing compared to the cost of raising a child. I suggest you forget about child life insurance and focus on making sure you have adequate life insurance on yourselves, retirement and education funding in place. If you still want to buy life insurance on your child, shop around and compare premiums and other features available with other highly rated companies.
For yourselves; I suggest term insurance. "Investment" oriented life insurance has a place in your portfolio only if you have already purchased less expensive life insurance for protection and have accumulated sufficient funds through your stock and bond investment program to meet your financial goals. Its great that you have inexpensive insurance through your employer but consider this as a supplement to needed coverage amounts. Most employer-sponsored life insurance ends when you leave the company for any reason. Your circumstances will determine the amount of insurance you should have. Rule of thumb: make sure the death benefit will allow the surviving spouse to pay off debts, fund college, invest for retirement and meet expenses for a number of years. If you need help determining the amount of coverage, meet with an objective financial adviser.
Straight term insurance is pure protection; there is no cash buildup. Its inexpensive because statistics show the odds are, you wont die while you own it. Term insurance provides the protection you need at the lowest cost. Annual Renewable Term (ART): 5-, 10-, 15-, 20 and 30-year-level premium/death benefit term and decreasing term are the main types. The shortest coverage period is going to be the least expensive. I prefer the level premium term policies. You may pay a bit more in the first years, but you gain peace of mind. There is no worry about future medical underwriting and you know what to budget. Chose a sensible coverage period, for your situation at least a 20 year level term policy will provide the protection you need until your child completes high school. Any money you have left after paying the lower premium should be invested toward retirement, college education, mortgage reduction, and other financial goals before you look into investment oriented insurance.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624