Depending on who you ask and what you read, purchasing life insurance for your kids is either a terrible idea or a stroke of genius. Most insurance companies — including emma.ca — argue that such a policy is a great way to save money for your children and protect their future insurability — in case their health takes a turn for the worst, a thing no parent wants to envision. On the other hand, many financial planners are wary of the idea of spending money on life insurance specifically designed for children, making the argument that there are better tools to protect them financially. Let’s dive a bit into life insurance for children in order to help you make an informed decision.
How To Purchase a Life Insurance for Children?
If you’re familiar with life insurance in general, you know that there are 2 main categories : term and whole life policies, each with its own benefits and shortcomings. That being said, the vast majority of life insurance policies designed for children are whole life, which — as their name indicates — is a permanent type of life insurance. The only way to bypass this feature is to purchase a term life insurance policy for your spouse and yourself and to add an extra policy feature for your kid. But more importantly, what would you decide to insure your children?
The Pros and Cons of Life Insurance for Children
Life insurance policies designed for children come with some pros and cons that can tip the balance for some of you when considering your overall situation. We’ll present them to you and let you make up your own mind.
The Saving Potential
That’s undoubtedly the most common argument in favor of purchasing a life insurance policy for your children: if nothing happens, it’s at least a form of savings. Indeed, the savings portion of a whole life policy (the cash value) grows years after years no matter what, and it’s tax-deferred, which means you’re not paying on the appreciation of this portion until you withdraw the money, at which point you’re going to have to declare as a revenue any amount you received above the premiums paid. That money can be withdrawn at any time and be used for likely expenses such as college tuition or a down-payment on a home.
On the other hand, it’s difficult to make the case that a life insurance policy is really the best investment vehicle out there because of the high fees charged by insurance companies, which inevitably chunk up a significant portion of the returns earned on your premiums. Plus, insurance companies hedge their bets, meaning that they primarily invest in low-returns, safe assets. You can get much higher net earnings investing by yourself, if it’s the primary reason behind your decision of purchasing life insurance for your kids.
The Protection Against Future Health Complications
Life insurance is like a loan or credit : you should take it while you don’t need it because when you will… It’ll be expensive or inaccessible. Children who develop a medical condition when they’re still very young are at great risk of not being able to get coverage later in life. In this particular situation, purchasing life insurance coverage now is the smart thing to do because it basically guarantees that your kid will have access to life insurance for the rest of their hopefully-long life.
That being said, it’s an expensive move designed to hedge against a fairly remote outcome. If you’re all about precautions, do you, but otherwise… It’s an almost-sinister argument that relies on an emotional “what if?”
The Actual Purpose of a Life Insurance
This last reason is even more sinister than the previous one, but still : underage children get sick and die before their parents, sometimes, and having insurance will provide you with a payout that should cover medical bills, funeral expenses and even family counseling if you need it. The counterargument is pretty much the same as the 2 other ones’: life insurance for children is an expensive tool designed for unlikely events.
Do you need life insurance for your children? There is no definitive answer. Assess your family situations and objectives, and make the best decision possible considering that as well as the pros and cons we’ve outlined.