Why You Shouldn't Buy Life Insurance for KidsSubmitted by Castlebar Asset Management on January 17th, 2018
Conversations around life insurance are fraught with emotions. Most salespeople know this, and the worst of them will try to play on those emotions to scare people and parents into purchasing policies.
Acting out of fear or obligation to your family can lead you to spend more money than you should for a policy that’s much bigger than you need. And in some cases, it can prompt you to buy a policy you never needed in the first place.
Most times, the latter is the case when it comes to buying life insurance for your kids. It’s just not something that most families need to purchase.
What’s the Purpose of Life Insurance?
To understand why, it helps to look at the purpose of life insurance.
The main reason to get life insurance is to replace your income for your beneficiary. In other words, the payout from a policy covers the financial need of someone who is currently dependent on your income -- and obviously, your income will disappear if you’re no longer alive.
Your kids probably don’t have income that you rely on, right?
Sometimes, in special circumstances, you could at least argue that insurance acts as a savings vehicle. But this isn’t the usual case and regardless, there are better ways to save and invest on behalf of your children.
Parents Need Life Insurance, But You Probably Don’t Need to Buy Life Insurance for Kids
When you consider why you might need life insurance, it becomes clearer that you might need a policy -- but for yourself, not your children. That policy will protect your surviving family members from financial hardship should anything happen to you.
That means most people only need insurance on the individuals in the family who earn an income that’s absolutely necessary to managing the family’s expenses and meeting their financial needs.
It might also mean a nonworking spouse needs life insurance if that spouse has other responsibilities and contributes to the household in a different way than an earned income. If you’re a stay-at-home-parent, for example, then you provide labor and childcare.
Your surviving spouse would likely need to start paying for those services should anything happen to you. If they couldn't manage to add those expenses to the household budget if you were no longer available to perform those jobs, you might need a life insurance policy to protect them from financial hardship (even though they earn an income).
When you consider all this, you don’t need life insurance for your kids because they’re not the ones earning an income, and therefore, their beneficiaries -- you! -- would not need a life insurance payout should anything happen to your child.
And thankfully, the majority of children are healthy and live for a very long time. If they choose to buy life insurance for themselves as adults, that will be their choice. But you don’t need to buy a policy for them when they’re kids.
Nope, You’re Not Providing Your Kids with an Investment
But what about purchasing life insurance for kids as an investment you make on their behalf? There’s a problem with that line of thinking, too.
Why? Because insurance is risk protection. It is not an investment.
An investment is a taxable brokerage account you can open in their name. It’s a Roth IRA you can help them contribute to once they pick up a summer job in high school. It’s a 529 plan that will help them pay for college.
Skipping Insurance for Kids Doesn't Mean You’re a Bad Parent
Remember, conversations about life insurance tend to be fraught with tension and emotion. You want the best for your children. You want to give them everything you can. And you want to protect them.
It’s very easy to prey on these feelings and fears and convince parents to buy life insurance, but not insuring your child’s life is a financially sound decision that does not mean you don’t love your kids.
In fact, it means you’re doing your job as a parent by setting a good example and demonstrating what financial literacy and responsibility looks like.
If you have kids, yes, you need to insure your own life so they’re protected from financial hardship should anything happen to you. You do not need to spend money on a policy for them, too.
Instead, put that money to use by addressing needs they (and your family) actually do have, like saving for college or even for your own retirement so you can take care of yourself in your old age and avoid being a financial burden to your children.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.