In the news: Juvenile Life Insurance: Should It Even Exist? (valuepenguin.com)
Thanks to Daniel Caughill of valuepenguin.com for the opportunity to be a source for his article on Juvenile Life Insurance. The article details whether this product is worthwhile along with new restrictions on these policies due to high-profile deaths. The bottom line is that life insurance is a financial leverage tool, that is primarily used to replace the insured’s income. And except in extremely rare instances, there are few instances where someone is dependent on a child’s income. You can read the article here: Juvenile Life Insurance: Should It Even Exist?
Following are excerpts with quotes:
We wanted to understand the thought processes behind the people who purchase insurance on the lives of their children, so we dug deeper into how the product is marketed. We spoke with Tony Steuer, a chartered life underwriter and advocate for insurance consumer rights, to gain his perspective on juvenile life insurance products.
Steuer gave the example of a child who grows up to earn a $50,000 salary. If that person wanted enough life insurance to replace seven to 15 times their annual income—a common benchmark recommended by some financial planners—they’d need around $500,000 of coverage.
“That is a crazy amount to have on a child, which most insurance companies wouldn’t write on the life of a child anyway,” said Steuer. On the other hand, a minimal amount of coverage wouldn’t provide much support three or four decades later. “If you got a $25,000 policy, then the child would always have enough to cover their burial costs, but it’s arguably not enough to move the needle in one direction or the other.”
This is due to the fact that most juvenile life insurance policies are whole life policies, which do include an investment component. However, as Steuer pointed out, whole life policies are also the most expensive type you can get, and they don’t tend to perform as well as other investment options.
For example, if you have a $25,000 policy on your child, for which you pay $200 a year, you won’t build up a meaningful amount of cash over 18 years, once policy premiums are taken out.
“Whole life policies are not really a good investment, even though there are many books that claim that they are,” Steuer said. “If you look at the actual internal rate of return on a whole life policy, you’ll find that it doesn’t yield that much, there can be restrictions on the access to the cash value, and it’s not going to provide enough coverage for (the child) to address real financial needs.”
Instead, Steuer recommends investing money in a cheaper, less opaque product, so your child can watch it grow and eventually cash it in for a major expense, such as college tuition. Your money will likely grow faster that way, and if the unimaginable happens, you can still tap into that fund for funeral expenses.
“Term life insurance is usually the best product for everybody,” Steuer said. “It’s usually death-benefit only, but that’s what insurance is about—it’s about covering a risk.” And if you, as a parent, purchase a term life insurance policy, you can typically add a death-benefit rider for your child for a very small amount. This benefit wouldn’t transfer to your child, but it would cover burial expenses if your child were to pass away. And since it’s far less expensive than most whole life insurance policies, it would free up funds to allocate toward other financial goals.
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