Which is the Better Choice for a Child? Whole Life or Term Insurance?
Term policies terminate. They end. On the other hand, a whole life policy will provide even if the insured lives to be 77 and beyond!
A life insurance policy for a child is about more than most think.
First things first, no sane person wants to see a child die. Period. The good news is, purchasing life insurance on a child isn’t at all about death – it’s about life and a long life at that. For anyone born in the USA, the average child can be expected to reach 77 years of age, according to current CDC estimates. So why “waste” money on life insurance?
A good life insurance policy is never a waste. By “good”, I mean a stand-alone whole life policy from a top mutual insurance carrier. Consequently a “bad”, or rather inappropriate policy might be a term policy that ends at some point in time. Even worse would be an “accidental death” only policy. Chances are neither of these would every pay out – thank God – and thus would expire at some future date. The good news is, they are cheap so the loss is minimized. If the insured dies of natural causes, then the accidental death policy would terminate without paying anything. Now consider a whole life policy.
What kind and how much?
Whole life insurance policies are almost always more expensive than term policies and for good reason. The term “whole life” means exactly that – the child is covered for as long as s/he lives – even until age 77 and beyond! Some companies offer plans where the premium is only paid for a certain number of years, such as 10 or 20 years so payments need not continue “forever”. Whole life plans generally build cash value however, in most cases, the cash value won’t be a lot and should be a secondary consideration. In addition, the death benefit is often limited to $75,000 or less. This means upon reaching adulthood, the insured should consider adding coverage for such requirements as income replacement or simply to acquire a policy that will build a better cash value.
Isn’t $75,000 a lot of insurance policy for a child?
Well, yes and no. Granted funerals around the nation average around $10,000 but there are other considerations. For one thing, most life insurance policies these days offer living benefits such as the option to receive part of the death benefit should the insured be diagnosed with a terminal illness. In such a case the living benefit could be a godsend, if not a literal lifesaver if a successful treatment is available but not covered by health insurance. In a worst-case scenario, the loss of a child carries unimaginable grief. The extra money could very well allow one or both parents to take much needed time off work to come to terms with their loss. So you tell me. How much is too much? But that’s not all.
Most children’s policies confer the right to increase coverage when the child reaches a certain age with out proof of insurability. This is often a multiple of the current death benefit. While I always recommend someone contemplating this move to seek out a better deal, sometimes there is no better deal out there. As mentioned previously, child policies are not known for cash value growth. This makes sense when you consider the compounding factor of paid up additions. The longer anything is compounded the more exponentially the value grows. For example a $5 monthly premium at a 3% dividend rate will grow to $6,789.73 after 50 years. After 75 years this grows to $16,403.75 or nearly 3X the value at the 50 year mark!*
*source: investor.gov financial calculator (beware! Playing with this can be habit-forming.)
Of course the other factors include the premium amount and dividend rate. While the dividend rate is a greater influence in compounding, the policyholder only has direct control of the premium amount and that usually only when first purchasing the policy.
These two factors combined reveal why children’s policies tend to be slow growth policies. The monthly premium is small due to the tender age of the insured and caps on the maximum death benefits. Plus, dividends on these policies are likely to be at far lower rates than on adult policies.
When your child reaches adulthood – more reasons they should be insured
For these reasons, it is advisable to compare available policies when the time comes to deciding whether to increase coverage on a current policy. If these policies are so bad, why bother at all? Good question.
The answer is guaranteed insurability. In other words, the insurance company is obligated to accept this insured no matter what. If the insured is otherwise disqualified from obtaining insurance, then this could make a huge difference in your child’s life. Reasons can range from a serious illness to a debilitating accident to a felony conviction. Yes, felons are often declined life insurance coverage. Rest assured if they can get insurance they will pay dearly for it. The same goes for the other factors also. Again, it is often advantageous to explore the market. Type the words “life insurance” along with whatever health or other issue you are dealing with into a search engine and see what comes up. Worst-case, you won’t find anything better but at least you can now make an informed decision.
While the above amount is the upper limit indicated by my latest research, no one should feel compelled to take things to the max. As with any decision of this nature, affordability should weigh heavily. Something is always better than nothing so if financial considerations dictate seeking out a $10,000 policy for basic protection then by all means choose that option. We did this for our own children. Sure money was tight, but I have to admit, I did not know any better at the time either. Had I explored other options, we may have done differently.
For one thing, I would have considered increased coverage. While a $75,000 policy might have been out of reach, one with a $25,000 death benefit may have been reasonably affordable. I’d much prefer they have the option to increase their coverage to $50,000 rather than $20,000. With costs rising as they are, I wonder just how far $10,000 will go in 40 or 50 years.
To summarize: Insuring a child’s life involves considerations far beyond contemplating the worst. As parents, grandparents or guardians, we tend to want the best for our children and, of course, we don’t even want to think that something could happen. However, insuring a child’s life is not about “planning” your child’s death. It’s about securing and protecting their financial future, as well as the finances of your whole family. Sure, the money would be there should a tragic event occur, but a sound life insurance policy will be there when you are long gone and your child has reached a ripe old age. During their entire life, it stands ready to protect their loved ones against a financial burden and provide a constant reminder of your love for them and your foresight.
Learn more about protecting your and your family in my new book “Life Insurance “Dirty Little Secrets” for Consumers Revealed!”. Even if you already have life insurance, there are things you should know. For those still unprotected, this slim volume answers those questions that keep most people from securing a solid, affordable policy. You’ll learn what to look for in an insurance company and a good policy to provide financial security for you and your family. Rather than being “sold” a policy, “Life Insurance “Dirty Little Secrets” for Consumers Revealed!” empowers you to seek out and secure the coverage that best works for you.