Should I get life insurance for my kids? I often get asked this question from clients who are parents.
The most straightforward and easy answer is… of course not.
Life insurance is mainly purchased as an income replacement so your spouse or children can maintain their standard of living. Or it’s often used to cover an expense(s) that survivors wouldn’t be able to pay for otherwise like a mortgage or fully funding children’s education needs.
Since children don’t have an income to replace, there really isn’t any reason to
it’s not just about the death benefit
However, I was recently talking with an insurance agent who has been in the industry for over 30 years. He said that insurance companies are increasingly asking for the results of direct-to-consumer genetic tests as part of their application process.
The concern is that as prenatal and newborn genetic testing becomes more prevalent, insurance companies will be able to get their hands on the results and deny these children coverage simply for having a higher likelihood of developing a disorder in the future.
Keep in mind this is all totally legal.
As you can imagine, this changes the game when it comes to life insurance for children. It’s no longer about simple income replacement, it’s about preserving a child’s insurability in the face of never being able to acquire it in the first place.
Insurability forever
So how can you go about acquiring insurance in a way that is actually going to preserve a child’s insurability?
A whole life policy.
Whole life insurance is a permanent form of life insurance. Once you have it, and if you continue paying for it, you have it forever. Well… until death.
I’m not usually a fan of whole life policies (or at least the way they are sold to individuals) but they do serve a special purpose in insurance planning. This being one of them.
The strategY
The strategy is simple. Purchase a whole life policy for a child as soon as possible. Preferably before any genetic testing is done.
Although, the amount the insurance company will let you purchase for a newborn typically won’t be enough for what the child actually needs as an adult.
The solution is to add a rider (an additional option to the policy) that allows the child to buy additional coverage in the future.
The options have different names – depending on the insurance company who’s providing it – but will usually be along the lines of guaranteed insurability rider, future insurability option, etc. The name doesn’t really matter, it’s the option to buy more coverage in the future that’s important.
The rider guarantees a certain amount can be bought at various ages (25, 28,31 37, 40), allowing a child to increase their coverage if necessary without having to go through any medical underwriting. That means no health questions or tests, inquiries about vocation or avocation, or anything else that may prevent them from obtaining coverage in the future.
I asked my insurance friend how much a typical policy like this costs. He said a $100,000 whole life policy with a $100,000 guaranteed insurability rider is $300-500 per year, depending on the child’s age.
The bottom line
This can be a smart strategy to ensure you, and your children, are in control of their insurability as they age, no matter what happens in life.
However, once the child is an adult and can purchase their own policy, it will probably make financial sense for them to explore term life insurance policies to cover their insurance needs at that time.
They can continue the whole life policy as well or they can simply stop paying the premium and let the protection expire if there isn’t a need for it anymore.