By: S. Alexis Grason
When a parent is holding her baby for the first time, a question furthest from her brain is, “Should I buy life insurance on this precious child?” However, that does not mean the question doesn’t pop into your mind at some point.
It tends to be when you receive the Gerber mailing with the iconic cute baby’s face or when a friend/neighbor (or insurance salesperson) introduces the idea and nudges you with a “should.” We all love the unsolicited advice.
You are smart enough to know it may not apply to your situation, yet it plants a seed in the back of your brain. Those seeds sometimes sprout into more significant ideas or nagging thoughts. It is not something FJY generally recommends; however, some new clients come to us with existing coverage, or a question asked with curiosity. That is what our blog is about: addressing all your financial questions, concerns, and savvy strategies for your wealth.
For those reasons, let’s explore if it is worth it by examining the three main reasons you may consider it and the flip side of those motives. And let’s explore it without the general biases of blanket statements like “absolutely not” or “of course.” We know one size does not fit all.
#1: You Want to Protect Your Child’s Insurability
You desire to protect your child’s insurability. This could be a lesson learned when someone you cared about was no longer insurable due to a health condition. It could also be an untraditional gift to your child when you want to protect their insurability since s/he is young and healthy. You could pay premiums annually for a policy you own on your child, and then when your child is old enough, change the ownership to be the child. Then s/he already owns a policy no matter his/her current health condition or recent past.
On the flip side, the odds are low that it will be “needed,” and if there are motivators for gifting funds to your child, could this be better accommodated with advanced planning strategies? Funding a permanent life insurance policy for your child is not a critical decision, like making sure you, as a parent, are adequately covered. At the same time, your responsibility is high, and your wealth is not high enough to create financial independence.
#2: You Want to Secure Your Options
You want to ensure that you have choices should the unforeseeable, most tragic event happens: your child passes before you do. Some say this is the absolute worst thing that could happen. As a mom, I know these deep, dark fears tend to pop up during moments of pure joy. Brene Brown calls this foreboding joy. Putting that aside, insuring your child’s life provides a lump sum of money that could give you time to grieve. This could be time (years even) away from work, or it could be a gift you pay forward to a cause that would bring a semblance of meaning to your child’s lost life…think St. Jude or research for other diseases or perhaps foundations.
On the flip side, resources that otherwise would be saved to a life insurance policy could be directed to your other financial planning contingency options. There are many goals to save for in life and many life curveballs to prepare for, have you taken the time and resources to prioritize all of this? Financial planning is all about prioritizing what needs to be accomplished and marrying it with your current funds. Take inventory of both – all goals and resources – before committing to one as there is a hierarchy of important goals and Plan Bs and Cs to the Plan As.
#3: You Wish to Create an Untraditional Savings Vehicle
You want to create a savings vehicle for your child and potentially create wealth for generations to come (read more for this robust topic). This scenario requires ongoing evaluation of the life insurance policy considering the long-term time frame and the fact that permanent life insurance policy is based on assumptions. As we all know, assumptions are not reality, so quality control checking your policy’s experience of interest rates and premiums against how it was designed to work is paramount. This is where a trusted insurance specialist can help you construct and effectively blow up the policy in various planning scenarios.
On the flip side, other savings and investment vehicles could accomplish the same objective. Have you taken the time to investigate these? For example, it could be a sentimental gift or creating resources to have a legacy that will surpass you.
Think Twice About It
There are many families (and financial professionals) who would hear this question and think “absolutely not,” “that is a waste of resources,” “someone is just trying to sell you an emotional need.” I do not disagree with these thoughts. I caution anyone who hears these absolutes to ponder the “why” behind each and if that is applicable.
There are many families where it does not make sense, or there is another way to accomplish the same goal. But if you feel there is a need or desire, explore that with a professional you trust so you can have a candid conversation about why it seems to resonate with you.
Please be clear, I am not advising for or against an insurance policy, especially a permanent one. As CFP®, who used to be able to sell insurance policies and has now chosen to be a “fee-only, fiduciary advisor” (Financial Advisors: What You Need To Know), I know how complicated that industry can be. Keep asking yourself the why question at least 3-5 levels deep before deciding (or purchasing a life insurance policy in this case). Get to the root of what you are seeking to accomplish or protect. Then, assess possible options for how as there are other options besides insurance.
Short answer: If the question piques your curiosity, then have an exploratory conversation with your family and trusted advisor to uncover the unasked and unanswered questions. Your voiced intentions will reveal if insurance is worth investigating.