The Cons Of Child Life Insurance

This article was originally titled “The Pros And Cons Of Child Life Insurance,” but I changed it when it was pointed out to me that I didn’t present any pros.

Most child life insurance policies are sold by tugging on the heartstrings of the parents, grandparents or guardians. The circumstances that would justify a separate life insurance policy on a child are very few and far between. A close look at what exactly life insurance is and why it exists will help put child life insurance into perspective (and illuminate why many people think it’s a scam).

What Life Insurance Is Good For

Life insurance is a risk management tool, despite all the bells and whistles insurance salesmen love to bring up. The risk life insurance manages is the economic losses incurred by the premature death of the covered individual. For example, if a man earns $40,000.00 annually, he can expect to earn $1,600,000.00 during his working years from age 25 to 65 (assuming he never gets a raise). If this man has a wife and minor children, they are dependent on his earnings. If he dies at age 35, his family will lose $1,200,000.00 of his expected earnings. Life insurance will offset all or some of that loss by paying the beneficiary the face value of the policy. If the face value of the policy is $1,000,000.00 the survivors will only lose $200,000.00 instead of $1,200,000.00.

Child Life Insurance Doesn’t Fit The Mold

Most minor children do not earn very much money, if any at all. People enter into motherhood and fatherhood to share their lives, wealth included, with their children. A separate life insurance policy on a child would be a waste of money (even more so than mortgage life insurance). The parents would be much better off adding their children to their own policy and establishing a trust fund for their children.

“Wait, so maybe the kid is a child celebrity with a multi-million dollar income.”  Even then, a separate child insurance policy would be a waste unless the child can be expected to continue making money into adulthood and is the family’s primary breadwinner. The death of a child is a very tragic event for the parents, other relatives and family friends. The losses are emotional, however, not monetary.

A Red Flag For Insurance Fraud

This leads to another reason not to buy child life insurance. In the early days of the life insurance business, a few parents would insure their children in the hopes that they would die soon and collect the policy’s face value. In fact, some parents would insure nonexistent children then report their deaths for the insurance proceeds. Occasionally, a parent would actually kill the child for the money. The insurance companies discovered some of these fraudulent acts and took action to curb the abuses. If a child with a large insurance policy whose only earnings were from a paper route or mowing lawns were to die, the beneficiaries could be investigated by the insurance company or even law enforcement, depending on the cause of death.

In summary, a life insurance policy on a child is rarely a good idea and usually a complete waste of premium dollars. Insurance dollars should be spent on the parents first and then a small amount on the child. Parents would be much better off by establishing a savings account for the child’ s future needs. A life insurance policy is not a good way to save for a child’s education.