If you are looking to buy life insurance for children, you might have come across the question” why would you buy a life insurance policy on your kids?” It’s quite a reasonable question, keeping in mind that children do not fulfill the main qualification criteria of being in debt or having people financially dependent on them. The argument can go like this, “Why would you buy a life insurance for children who are born in good health and will live for a long time?” In this topic today we will consider all kids below 18 years of age as our group.
Understanding The Need To Buy Life Insurance On Children
Think Beyond Loss Of Income: – The general consensus when it comes to buying a life insurance policy is that it is a financial tool to indemnify loss of income. If this hold true, then why do we see husband’s purchasing a life insurance policy on non-working spouses. If you fall into this category, then you might be able to give a justifiable answer. The last thing you can expect is to face financial hardships along with the emotional turmoil of losing your child. Hence, life insurance is not only purchased to cover loss of income but also to ensure that you can take of any sudden financial obligations like final expenses. It’s a very prudent thought, but you should carry enough coverage to cover your child’s final expenses if anything unthinkable happens. Funeral expenses can easily cross the $10,000 mark in today’s scenarios. So you need to think, if anything happens, are you in a position to cover this cost?
Buying a life insurance policy on your kids would be a viable option if you as the main earner in the family is financially secure and on track with your retirement planning. If you are well placed as far as consumer debt is concerned then you have another good reason to buy life insurance for your kids.
Future Insurability Factor: – A lot people don’t think to far. Buying a life insurance plan at a young age reinstates the insurability factor. This is furthermore important if your child develops critical illness in later stages of life. If you buy life insurance when your loved one is old and already diagnosed with a major illness then the cost would be extremely high. Once a life insurance policy is issued it remains in force regardless of your child’s medical condition.
Creating A Buffer To Recoup Educational Expenses: – Before we even discuss this topic, keep your emotional side aside. Yes, coz you might not like the idea at all but the reality is we cannot control finances through emotions. So the extreme scenario where a life insurance policy for children may be a good option is the death of a child before he/she completes his/her education. If you had taken out a federal loan then you have the option of student loan forgiveness but personal expenses and 529 expenditures will be lost.
Buy As Early As You Can: – A lot of my clients ask this question which I hear at least once in month. “What is the right time to buy a life insurance policy?”. The simple answer is long before you even need it. If you are a working professional then buy in your 20’s and you will reap the benefits in the long run. Trust me.
Emotional Counseling: – In a scenario where a loved one is no more, parents do need counseling. In such an event does your health insurance plan cover anything like mental health counseling? Will you be in a position to pay these types of expenses from your own pocket?
What Type Of Life Insurance Policy Is The Best For Children
If you know the difference between term and permanent life insurance then one thing is quite evident that a term plan is not what will suit your requirement. Reason being, by the time your child start earning good income his term life insurance will run out.
Second option you have is whole life insurance. The advantage here is the cash value component which keeps on growing as your child grows older. As an example, if you buy a $200,000 policy on your 2 years old child then the starting cash value will be zero. By the time your child is 30 years old, cash value may be at $50,000 and by the time the child turns 50, cash value may rise to $70,000.
Within whole life policies you have participating and non-participating polices. If you check the article on dividend paying whole life insurance policies you will get some basic idea on how these insurance plans work. There so many other plans which can suit your specific requirement and your situation. Your insurance agent can help you in this regard.
Never Buy Life Insurance For Your Kids Thinking It As A Long Term Investment
There is a lot of wrong advice floating around. Many insurance agents and financial advisors will sell you a whole life insurance policy for your kids on the fact that you can accumulate cash value in the long run. Do not get into such traps. Using life insurance as an investmenttool may not be an ideal way of saving money for the future for many.
There are much better alternatives if your only goal is to grow your money inclined towards your child’s future. In future articles I will discuss these options in detail but just to give you a heads up,
- You are better off opening a Roth IRA if you kids have taxable compensation as laid down by the IRS in Publication 590. This is a smart and cheaper way of planning leap years ahead of your kids retirement. Moreover, if the need arises, your children can withdraw money out of Roth with any tax implications.
- If saving for your child’s college fees is your goal then putting money aside in a tax advantaged Section 529 plan is a very good investment vehicle for you.
- In the 2014, as per current tax regulations, you can gift $14,000 per year without incurring any tax liability. If you have the liberty of combining this with your spouse’s account then this increases to $28,000. Keeping this in mind, open a mutual fund account under your name with a thought of giving the money to your children when the need arises. Alternatively, subject to the gift limits mentioned you can transfer the money into a brokerage account owned by your kid (18 years old) and handle the investment part.
- If your child is young, less than 15 years old then a custodial account is a better option.