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The Money Mom: Life Insurance for Children

iStock_000002580069XSmallI’ve talked a few times about the importance of having life insurance as a parent.  In fact, I touched on it just last week, and full details are in this post.  But one question I get again and again from parents is whether they should purchase a life insurance policy for their children.

The answer is no.  Children’s life insurance is typically marketed as a way to protect your child in case he develops a chronic illness later in life that would make him uninsurable.  If you buy coverage now, he’ll already have that policy in place. Many insurers also tout the benefits of having a policy on hand that will pay for burial expenses, and some offer coverage as a way to save for college – the premiums you pay for a whole life policy will build up over time, and you can borrow from the cash value.

But here’s the thing:  Life insurance is a valuable tool, but it’s a tool for people who are bringing in an income.  If you have other people who depend on your paycheck – your kids, your spouse, your elderly parents, in some cases – or you’re a stay at home parent and your spouse would have to pay for day care if something were to happen to you, you need life insurance.  Children don’t fall into either category.

I think the first reason insurers give in favor of life insurance for children – to protect them from being uninsurable later on – is the hardest one to get over, as a parent.  But it’s also very unlikely to come true.  Chances are, they’ll be able to purchase an inexpensive term life insurance policy as an adult, or they’ll be eligible for group life coverage through their employer.  As for the other two reasons? There are less expensive ways to scrape together the cash for funeral arrangements, and much better ways to save for college.

In both instances, you’re better off saving and investing on your own.  Start with an emergency fund, and build up six or, better yet, nine months of living expenses in there.  Then split the difference between saving for your own retirement and saving for college. Your retirement comes first, so grab any matching dollars you can from your employer’s 401(k).  With any money left over,  open a Roth IRA, if you’re eligible (you can make the full contribution of $5,000 if your adjusted gross income is less than $167,000 as a joint filer or $105,000 as a single filer).  When college comes around, you can decide whether you want to use the money you’ve accumulated in the Roth for it, or save it for your own retirement.   And if you still have money to set aside after you’ve topped out the Roth IRA, and you want to save more for college, look at a 529 plan.

And, just to give you the math behind my reasoning, I did some digging and found that $50,000 of coverage for a one-year-old in my area would cost about $32 a month, or $384 a year.  That doesn’t sound like much, but invest it in a Roth IRA at an 8% return and you’ll have $15,236 by the time your kid is 18.

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