General Life Insurance Topics
What is Child Life Insurance?
Emotional vs. Practical Decision
No one seems to get too emotionally involved when addressing the expense of spending money for clothing apparel, sporting equipment, music lessons, summer camp, or even the purchase of a car. In fact we seem to look at the expense of raising a child to age 17 as just a necessary given if we are going to have a family. But, when it comes to purchasing life insurance on a child emotions run the gamut from legitimate way to protect investment in life of a child to getting rich from the untimely death of a child.
Here are some interesting facts regarding the expense of raising a child which may impact the decision whether to purchase or not purchase insurance.
According to one source which tracks these expenses, the average cost of raising a child from birth to age 17 is $233,610 in a married two parent middle income family with two children. U.S. Department of Agriculture (USDA) report from 2017 using information from 2011-2015 and figures in 2015 dollars, single parent families who made less than $59,200 spent an average of $172,200, while those who make over $59,200 spent $319,020 for the same time period. (Keep in mind these figures do not include any college expenses)
Different regions and demographics reflect varied amounts from those listed above, but the point is–it is not cheap to raise a child and in fact is quite an economic commitment. Would you consider any other potential $233,610 investment with other intrinsic values going unprotected in your financial planning?
Argument against purchasing life insurance
The elephant in the room is the thought some have of not wanting to get “rich” from the untimely death of a child. This emotion is so strong many cannot divorce themselves from it so they can make a sound financial decision based on the timeline of life. The thought of having life insurance in force brings our mortality too close to reality. No one wants to deal with this factor in our timeline of life. Maybe there is a third option for our child, that they won’t get older and they won’t die. Maybe we can just freeze them in time so we don’t have to deal with making a decision. However, at some point, life insurance becomes a very important financial planning tool.
With the financial obligations waiting in the child’s future, some planning today can and will make those obligations more bearable. One must remember life insurance has to be purchased before it is needed. If not, it is like trying to order up a parachute while the plane is already coming down. Consider the following regarding the “getting rich” emotion of purchasing life insurance on the life of your child and see if it helps in purchasing life insurance earlier rather than later with the long term purpose in mind.
Death Rate Data
From 1980 to 2017, death rates for infants fell from 1,288.3 per 100,000 to 567 per 100,000. Death rates were highest among children under age 1 followed by children age 15 to 19, 1 to 4, and 5 to 14.
In 2017, males aged 15 to 19 were more than twice as likely as females to die (72.7 versus 29.4 per 100,000) with over a quarter of male deaths coming from road accidents.
https://www.who.int/maternal_child_adolescent/data/causes-death-adolescents/en/ has some intriguing facts regarding the causes of death to go along with those listed above.
Description of Child Life Insurance
With this additional information in mind, let’s go back and fill in some information which will shed light on purchasing insurance for children.
What is it? It may best be described as any form of life insurance purchased on the life of the individual child. This could be in the form of term insurance, modified whole life, whole life, universal life, variable life, or endowment life.
- Term Insurance. This is a stand alone policy where the child is the insured with the owner, payor, and beneficiary being the person purchasing the policy. This normally is a parent or in some cases a grandparent with the permission of the child’s guardian. The policies are extremely inexpensive during the child’s growing up years and become increasingly expensive with each passing year.
Somewhere in the future this term insurance policy will meet the fate of most term policies by simply being terminated or converted to a permanent plan of insurance. It is a fact that less than 2% of all term policies written ever pay out a death benefit. If this type of insurance is written on a child it could only be to protect the insurability criteria (future health issues, occupational hazard, military exposure, or foreign travel) of insurance without it having the tinge of making money upon the death of the child. These types of policies are only issued after careful scrutiny by the insurance company to determine legitimate reason for coverage and if there is not a reasonable financial purpose, most life insurance companies would not issue a policy.
- Child term rider on parent’s policy. This is perhaps the most common way of putting life insurance coverage in force on the life of a child. The parents simply add this rider on their permanent life insurance policy without naming a specific individual child.
The rider is written with a certain face amount per child naturally born or adopted by the named insured on the policy. When children are born or adopted, they automatically are protected up to the face amount of the rider. The coverage continues up to a certain age, i.e. 18, when the child is no longer covered but can have a life policy issued up to the amount of the rider or an amount allowed by the terms of the rider.
This is a good protection against the expense of any untimely death, protection for future needs, guarantees the ability to purchase additional protection, but fails to provide any living benefits of a cash reserve.
- Modified Whole Life. This policy is written with a specific initial face amount and premium. As the policy matures, the face amount will increase over time while the premium remains the same, or the face amount will remain the same with the premium increasing so there is an acceleration of the cash reserves.
Since mortality rates are so low during infant and adolescent years, much of the premium is going to cash reserves which are returns on investments insurance companies make and the interest earned from those investments.
These policies have a problem with the insured understanding what is happening to the policy because of the moving parts in it. Make sure you understand what is occurring and how the policy is administered before you purchase it.
- Whole Life. This is the workhorse of child life insurance. It is simple and straightforward. A face amount for a death benefit is chosen, the premium is established, and the policy waits for the events in which it can become operative. It has the element of a death benefit and a cash reserve which can be used for a myriad of reasons during the lifetime of the policy.
With today’s advanced underwriting abilities and understanding of probabilities, these policies can become an integral part of planning for costs of education, purchasing a home, providing startup funds for a business, supplemental income for future retirement, etc. In the event there is an untimely death, this policy is activated to cover that event as well.
- Universal Life. Due to the pressure of public opinion that whole life insurance wasn’t a good financial investment and was too expensive, therefore one should buy term insurance and invest the difference–the insurance industry came up with a provision of separating the actual cost of insurance protection and the cash value benefit. They determined to charge the expected death benefit protection and allow the insured to choose what financial resource they would like to have used for investing the rest of the premium. This allowed the insured to keep using the insurance company for protection and use their own expertise for investing.
This policy then for a child is simply issued at an early age allowing it to accumulate cash reserves over time. When the cash reserve is used as a withdrawal, the death benefit is reduced; or, when the cash reserve is used as a loan, the loan can be paid back at any time or deducted from death benefit when death occurs. This policy is subject to volatility of the market and if not administered properly could fall short of the cash accumulation the parents may be looking for down the road.
- Variable Universal Life. In addition to the explanation of Universal Life, this policy is also unbundled with extra opportunities for more investment options. This could include a declared option which has an insurance company guaranteed rate of return and various mutual fund accounts ranging from very aggressive investing to very conservative strategies. This is all left up to the insured to decide. Again, if the insured is not careful in watching how investments are functioning, the policy could end up where there is not enough premium to pay for the death benefit, and the policy could lapse.
- Endowment Life. This is simply a whole life policy which is intended to pay a specific amount at a specific time. It is usually written to pay out in 15, 20, or 30 years with more emphasis on the cash accumulation than on the face amount. It would be worth getting additional information as to how this would function for child insurance.
- 529 and Clovedell plans. Having examined all these child life insurance options, there is a financial option yet to be considered and that is to buy term and invest the difference. Why not take advantage of 529 and Cloverdell education plans which allow individuals to invest money which can be taken out income tax free for educational purposes. It is not the intent of this paper to review them but just mentioned to tweak your interest. So, the term policy protects the child’s future insurability and reimburses parents if death were to occur; the education plans covers what most parents desire for their children, and that is to allow them access to an education.
Parents who look beyond the one dimensional view of life insurance as just a death benefit can greatly enhance the financial future of their children by the use of any of the above financial instruments. Wouldn’t it be nice when your son or daughter announces they have found their beloved to hand them a life insurance policy with cash value available to help them get off to a good start on their financial journey?