A post from Heather C., our CMF Finance Coach:
Have you ever seen a commercial for children’s life insurance? I saw one the other day, and it tugged at my heart strings and made me want to run out and buy life insurance policies for both my little boys. Mrs. Fanning – if you don’t have life insurance for your daughter (both of them, actually), stop reading here and get it now. As for the rest of you, read on.
Of course you want to create a savings plan for your child, and should the unthinkable happen, the last thing you want to worry about is funeral or burial costs. But before you run out and purchase a life insurance policy for your child, ask yourself the following:
1. What type of return do I want? Children’s life insurance policies are typically marketed as savings plans. The catch is, when your child reaches adulthood (age 21 according to a popular plan), the plan will pay out, but you’ll have to pay tax on the money you receive. Not to mention, the returns are abysmally low.
2. What are my alternative investment options? If you want to start a savings plan for your child, there are other, better options available to you. Consider a Roth IRA, a Coverdell Education Savings Account (ESA), or a 529 plan before you consider life insurance for your little tot. If you’re concerned about funeral costs, you’re better off adding a rider to your own life insurance policy.
3. What are the chances of something happening? I don’t want to jinx myself here, but statistically speaking, mortality rates in children are pretty low. Children’s life insurance companies will remind you that should your child develop a medical condition that renders him uninsurable, your child can carry this policy into adulthood while avoiding the higher premiums he typically would pay. Life insurance just might make sense if your child develops a condition during his or her lifetime. But, you really have no way of predicting this. And remember, the chances are slim, especially if you don’t have a family history of illness – too slim to choose children’s life insurance over some other more lucrative options.
4. Are you Dakota Fanning’s mom? This really is the driving question. Seriously – does your child pay your mortgage or give you an allowance? The main objective of life insurance is to cover income that would otherwise be lost. And while, in my completely unbiased opinion, my boys are cute enough to have their own baby-model contracts, for now, they’re just depleting our bank account, not adding to it. If your child just bought you a brand-new Mercedes, buy life insurance for that kid now. If your child just smashed another goldfish into the car seat of that nine-year-old minivan you’re still making payments on, hold off on that life insurance.
So when should you purchase life insurance for your child? Basically, never (except for you, Mrs. Fanning).
Wishing you a great financial future,
Heather C.
**Have a comment or question for Heather? She’ll be checking our comments and will answer any questions you have!**
The Roth IRA is a good idea, but you can’t open one in your child’s name. You must have earned income (or be the spouse of someone with earned income) to be the owner of a Roth IRA. Of course, you could use your own Roth IRA to save for your little ones.
Great point, and thanks for your comment. You’re correct – either your child would have to have actual income from a job to open his own IRA, and he may only contribute the lesser of $5K or his total compensation (in other words, parents can’t match).
Or, more likely – given that many of our readers have children that are not yet at an employable age – you as the parent would open a Roth IRA and withdraw your contributions (not your earnings until you’re age 59 1/2) tax-free to pay for college tuition.
i loved your article. you’re correct. i never took a life insurance policy on my kids because i never knew when i was going to kill them especially in those teenage years. they turned out to be two of the most wonderful people in the world. stephanie ps. you can open an ira for your child as a T.O.D.