It’s that time of year. No, not tax time (though it is that, too). It’s birthday season in my family. And with birthday season comes the annual renewal of life insurance policies–specifically, for two of my kids. When I opened the bill yesterday I realized I once again had lost the bet, and was now faced with ante-ing up for another round of the game.
Sounds crass, doesn’t it? But that’s the reality of life insurance (any insurance for that matter). Insurance is intended to cover the cost associated with a particular (bad) event–like your home burning down or your car being damaged. In the case of life insurance, the insurance purpose is to replace the economic value (i.e., present and future earning capacity) to the beneficiary of the person who dies. Taking out life insurance is effectively putting money down on a bet that the insured person is going to die in the next year (assuming annual premiums). If the insurance company loses the bet (the insured person dies), they pay the contracted benefits. If the person who owns the policy loses the bet (the insured person doesn’t die), then they are faced with re-upping the bet for the next round.
Now think about life insurance for your child. Unless you’ve parented a child prodigy in some particular field or have a child in the entertainment business, chances are your child makes little to no positive contribution to household income. (No, let’s NOT discuss how much of a net-cost they may be.) There is no loss of economic value associated with the child’s death (unless your child performs household services that would need to be contracted out–and you’re paying them less than their worth). For a strict cost-of-death perspective, the only value to be insured in that case may be the cost of burial.
There are other reasons for taking out a life insurance policy. It may be an investment vehicle (though likely not your best option if that’s your real objective for your child). Or the policy may include an option for the child to increase their policy coverage when they reach adulthood even if they would be otherwise uninsurable (or insurable only at high cost) due to a yet-undiscovered health condition. In which case, you’re now betting that the child will either die or develop a life-threatening condition before they reach adulthood. Yeah. Nice.
I’m not suggesting that you shouldn’t buy life insurance for your child…nor even to limit the policy necessarily to the amount of expected burial costs (and minimum policy coverages may be well above that anyhow). But if you do consider whether to take out a bet against your kid’s life, be sure you’re making the decision based on clear thinking and not emotions. Insurance agents are good at playing on emotions (they are sales people after all). And if you want a nice laugh, turn the tables on the insurance agent and explain to him/her that you are uncomfortable with the agent suggesting that your child is going to die in the next year and that you should be taking out a bet on it. (Trust me, the look on the agent’s face can be priceless.)
More seriously though, most adults–particularly younger adults–are woefully under-insured on the same basis that child policies are over-insured. If you are a parent of young children and have limited dollars for life insurance, you are far better off making sure your coverage is adequate to replace your present and expected future earnings before considering a policy on your child. Unless, that is, your child makes more than you.
Mike, interesting analysis. But you stopped too soon. What about insuring my child when I’m entering my dotage and may need the child’s assistance, financial or otherwise, in old age? Does that change the equation? Cost of premium will be higher; cost of loss of support may be similarly higher.
Ken,
At that point the equation has changed entirely because there is an economic value to insure. However, it’s difficult to assess what that value will be when the child’s young…and it assumes great confidence that your child will in fact support you financially in your dotage.
It could be interesting to compare insurance strategies of starting when they’re young versus once their economic value is established versus other forms of insurance and financial planning.
excellent post and the topic discuss here is great.