Should you Purchase Life Insurance on Young Children?

Many financial planners are divided about the issue of purchasing individual life insurance policies on young children.  In some cases, this may not be a good purchase by parents or guardians, but there are exceptions to every rule.

At many companies, employees have the option of purchasing group term life insurance coverage on their immediate family members, e.g., spouse and natural and adopted children.  As a result, many financial planners warn their clients not to purchase an individual policy on their children.  But, if a client’s employer does not offer group term life insurance coverage on its employees’ immediate family members, what is the client supposed to do?  Logically, the answer depends on the family‘s finances.  Not every family has $5,000 - $10,000 in a non-retirement brokerage or bank account to spend on funeral expenses.  Taking a loan from a 401(k) account can cause more of a hassle than purchasing a $10,000 life insurance policy on a child.   On the other hand, if a family has the assets in a bank or brokerage account, there is really no need to buy a small life insurance policy for burial purposes on young children.

Some parents are cautious.  They do not want their young children to be underinsured throughout life, and these parents have the discretionary income to pay for life insurance policies.  Therefore, these parents may purchase a $100,000 or $250,000 life insurance policy on their children.  Remember, some kids will develop asthma, diabetes, or heart disease, which will make it more expensive for these children to be insured.  The life insurance policies that I mentioned in the last sentence are often called graded life insurance policies.  Most graded life insurance policies require the insured to live two to three years after the policy’s issuance; otherwise, the beneficiary will receive a reduced benefit, if the insured should die within the initial two or three period, depending on the policy.  Parents, however, cannot purchase more life insurance on a child than they have purchased on themselves.  Family risk factors can play a role in a parent’s decision to buy life insurance on a child.  Financial planners must be understanding to each client’s needs because not every client has the same risk tolerance.