I previously wrote about life insurance on kids, and also discussed a rider that guarantees future insurability. Because there are so many articles and blog posts that criticize this practice, I thought it important to revisit the issue.
First, it isn’t a necessity. It is just an advantage to provide, and should only be considered after the parents have implemented their insurance program and are contributing the maximum to their retirement plan(s). Then and only then would it make sense to allocate resources to a child’s life insurance policy.
The primary advantage is an economic one. The annual premium for a $250,000 policy on a male (female) newborn is $985 ($805), whereas the premium for a 25 year old is $2,200 ($1,905) and a 35 year old would pay $3,300 ($2,703).
Additionally, a guaranteed insurability rider can be added for a very modest cost (<$70 in the example above) that provides for the option to purchase up to two times the base face amount (capped at $125,000) every three years beginning at age 25 and ending at age 43. Again, using the example above, that would guarantee the ability to purchase $875,000 of additional coverage at standard rates with no underwriting. For someone with health issues, that could be invaluable.
Just how valuable? I was speaking with a colleague recently and he related this experience of his. He had sold a $50,000 policy with the guaranteed insurability rider to a client who had just had a baby. The annual premium was $360. The child was diagnosed as being autistic, and when he was seven it was determined that the autism was severe enough that he was considered disabled.
From that point on, the insurance company has paid all the premiums (the child is now 15), and beginning at his age 25, they will exercise and pay for each option. I ran some quick numbers and determined that at the child’s age 65, there will be over $650,000 of cash value and the face amount will exceed $1,400,000. Do you think any of the naysayers could convince this man that he made a mistake in insuring his newborn?
Now obviously this doesn’t happen in the vast majority of cases, which is good! In most cases, the child reaches age 25 in excellent health, so the only benefit the guarantee provides is that no exam would be required to get the insurance.
In conclusion, life insurance on children doesn’t make sense for the majority, as the available resources are usually needed for more pressing concerns. But for those with means, a compelling argument can be made for insuring the kids. And if you’re a grandparent with means, is there a more valuable gift you can give your grandchild?