Sometimes it's sensible to buy life insurance for children


Fourteen years ago, George F. Leupold Jr., a financial planner in Cherry Hill, N.J., did something that many in his profession might regard as nuts.

He took out life insurance on his two sons, ages 9 and 7.

About 15 percent of all life insurance policies sold in the United States are for children age 14 and under, according to industry figures. The average death benefit on those policies is about $22,000.

Financial gurus have insisted for years that policies for children are a waste of money. Unless, of course, your child earns big bucks mowing lawns or shoveling snow, and contributes meaningfully to the family's fiscal upkeep.

It may sound cruel, but it's true: The death of a child usually does not create long-term financial woes; it can do just the opposite. Some estimates place the cost of rearing a child to the age of 18 at up to $100,000. Throw in college costs and you're talking about plenty more.

To a degree, Mr. Leupold agrees with that basic philosophy. But there are times, he said, when insuring a dependent child makes perfect sense.

In his case, Mr. Leupold bought each of his sons a whole-life policy, a type of coverage that can be kept in force for as long as the insured person lives. And the premiums stay the same

through the life of the policy. He wanted to guarantee that his sons would always have life insurance, in case they developed a life-threatening illness that could prevent them from qualifying for coverage later.

Though neither son has developed a major illness, Mr. Leupold still says the insurance was a good idea. The policies have built up enough cash value that dividends on the policies are enough to pay the premiums. Thus, his sons have lifetime protection. Or they could cancel the policies and take the cash.

"In my opinion, it's nicer than giving them a car that's worth a couple thousand dollars," Mr. Leupold said.

But even he concedes that many parents buy insurance for their children for the wrong reason. "The death benefit is probably the least of the reasons to buy it," he said.

Other experts take a strong view against insuring children.

"There are two major purposes for life insurance," said Nancy Hanna, president of Financial Planning Advisers Inc. in Wyomissing, Pa. "The first and primary purpose is to replace the income of a wage earner. The second reason is to pay estate taxes or to provide cash at death to pay medical or funeral bills."

Indeed, many parents do buy life insurance to cover funeral costs. But for a child, even that may be a financial mistake. The mortality rate for children is extremely low, and the money paid out in insurance premiums could be saved or invested to build an emergency stash.

But if a specific life-threatening illness runs in the family and you think your child could develop it later, then life insurance could be a good bet, Ms. Hanna said. Once an illness is detected, buying life insurance could be impossible.

If you do buy insurance for your child, a whole-life policy probably would be best. It will cost more than term insurance, but it has two key characteristics: Part of the premium will go to build cash value, which can increase over the years tax-deferred. And unlike typical "term" insurance, which covers a specific period of time, whole-life policies can't be canceled. So if a child develops a major illness and can't buy insurance for himself, he still could be covered by the whole-life policy.

Cash accumulation is a reason why many parents buy insurance for children. They see it as a savings vehicle for future expenses, such as college or weddings.

"If you are trying to accumulate money for your kids, and you like the regularity of paying monthly premiums, then whole-life might be a way to do that," said Joseph M. DiCarlo, a financial planner at Allegheny Financial Group Inc. in Pittsburgh. "But I would not recommend it. I'd look for an alternate way."

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