Life insurance for children does not provide enough benefits to be justified, argues one expert
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It’s only natural for parents to want the best for their children, and generally, that means starting good habits at a young age. Whether it’s education or savings, an early start is usually a great gift for a son or daughter. But according to the former chairman and CEO of Allianz Life North America, that isn't the case when it comes to life insurance.
“The only valid rationale for life insurance is to cover any economic loss that may occur in the event of the death of the insured,” said Bob MacDonald, founder of LifeUSA in an article in Forbes. “Parents and grandparents will certainly suffer an emotional loss at the rare occurrence of the death of a child, but rarely will this create a debilitating economic loss for the parents or family.”
A commonly offered argument for juvenile insurance, MacDonald said, is that a life insurance policy with very cheap rates could be important in case the child grows up and somehow can’t qualify for life insurance. “That sounds nice, but the reality is that a vast majority of all individuals are able to qualify for life insurance well into middle age,” he said.
While insurance companies may suggest that an early start on whole-life insurance can be a useful way to pay for college, it is one of the least effective ways to do so, believes MacDonald. Juvenile life insurance policies typically don’t exceed US$10,000 in value and that means the amount of cash accumulated in a policy by age 18 is generally no more than US$1,000.
Companies limit the amount they issue on children to avoid a “perverted incentive that the child becomes worth more dead than alive,” MacDonald said. The risk is prevalent in the US, where only a handful of states currently have safeguards against fraud and ill intent.
The Washington Post reported one case illustrating the danger. In 2012, a 15-month-old named Prince McLeod Rams was murdered by his father who, despite having shaky finances and a suspicious resume, had managed to get more than US$500,000 in insurance on the boy’s life. The application process was essentially conducted over the phone, reported the Post, which is consistent with experts’ assertions that obtaining life policies for children is easier than getting one for an adult.
“The reality is that most parents are underinsured relative to the economic plight that will befall their young children if either of the parents dies,” MacDonald said. “Rather than wasting money buying unnecessary life insurance on a child, those funds could be diverted to buying life insurance on the parents where, most often, the insurance is needed.”
