As a father of two, the topic of term
life insurance for babies is hard to
even discuss. At the beginning of
life, they last think you want to
consider is the end of life. A
large number of people actually request
information on this type of insurance so
let's at least provide them some
guidance on term life for babies.
The
first consideration is term or whole
life. As you've seen throughout
our website, we believe in term life
over whole for a reason...insuring 100%
of a risk (in this case, your v=babies whole
life) doesn't make sense in the world of
insurance. In fact, it's not
insurance at all. You're basically
paying a $1 to get a dollar and if you
calculate the investment loss and time
value of that money...you're actually
paying more. The reason we even
revisit this question is due to the fact
that a baby's expected length of life
insurance need is so large. Does
whole life make sense in this case?
This
is the issue. You're paying much
more for whole as compared to term.
Invariably, you're buying less actual
coverage initially for the same premium
amount. Is this amount of term
life coverage satisfactory? This
goes back to a critical question and
unique one for babies...what exactly are
you buying the coverage for? If
you are buying the coverage to protect
until your baby is an adult and
hopefully self-sufficient then an
inexpensive 30 year term policy is
probably a better option.
If you want to provide some type of nest
egg that grows with time that your child
can borrow against, then you're probably
better off investing the money on their
behalf (with a licensed professional
advisor). Some people believe (or
have been sold) the use of whole life in
this fashion but I personally find it
hard to see who it benefit aside from
the life insurance carrier and agent.
Ultimately, the problem with this method
is the amount of actual coverage you can
afford. Does it make sense to have
life insurance that lasts the whole life
of the baby if you're only able to
afford 1/10th of the actual protection
that you need. Yes, 30 years from
now, cash value might build up
sufficiently to cover this but the point
of life insurance is to offer full
protection right away...day 1 of the
policy. You're gambling that you
won't use the coverage in the first 5 or
10 years but that's just a stone's throw
from gambling that won't need life
insurance coverage at all. A
difference in scale...not in kind.
So what's a strategy?
We
recommend looking at 30 year term life
insurance. This covers baby way
into early adulthood. At that
point, your "baby" may decide to
purchase his/her own term life insurance
which is incredibly inexpensive at the
age of 30. He or she can make
decisions based on a potential new
family of their own and pick an amount
of term and lenght of term that
correctly reflects these new needs.
This two-prong strategy (30 years for
baby and then separate policy for young
adult) is the direction we would look to
insure a baby. The cost structure
of this approach allows for sufficient
coverage for your premium dollar.
Some
people want to insure just final
expenses for a baby. This means
they want to cover what would be needed
financially in case a baby or child
passes away. Term is a way to address this
with common term amounts of $10K.
This should be adequate to
account for funeral costs and some
financial needs associated with such a
trauma to the family. Keep in mind
that there are limits on the amount of
term that a carrier will allow for a
baby usually at $10K and the rate is
higher at about $6 premium per $1000 of
coverage. Coverage on babies is
sometimes only available as a rider on
an adult's policy (not stand-alone).
Death
is never easy to plan for...especially
for a baby but it doesn't make sense to
look the other way and hope for the best
with any type of insurance need.
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