Summer 2010 | Volume 108 | Number 656
Life Insurance for Children?
By Donna Mulder
"Why would I buy insurance for my child? He doesn't bring home a paycheck."
"My child is healthy. She can get her own insurance when she's older."
"If I'm going to save money for my children's education, there are better ways to do it than life insurance."
Have you heard any of these statements before? Maybe they even reflect how you feel. Bring up the topic of life insurance for children and inevitably the lines for and against will form. "Life insurance for children is an emotional issue," says Todd Yeiter, director of insurance products at Thrivent Financial for Lutherans. "No one wants to think about something happening to their kids. And they certainly don't want to feel like they would 'profit' from their child's death. But that's missing the point of why you insure a child."
Read on for three things you may not have thought about.
If you believe: "They can get insurance later if they want to."
Ask yourself, What if they can't?
What if your child develops diabetes, cancer or any health condition before they get to an age where they decide to buy life insurance? If your kids are healthy today, they're insurable today. While the odds are in your favor that your child will stay healthy, there are no guarantees. "If it's your child who is injured in an accident or gets a medical condition that would make them uninsurable, the odds don't help," Yeiter says. "It may be better to protect their insurance options now."
Granted, not all health conditions make a person uninsurable. You may be able to buy life insurance if you are diagnosed with diabetes or some types of cancer, for instance. But they can affect insurance premiums. For example, someone with diabetes may be insurable, but the premium may be significantly increased, says Yeiter.
When insuring a child, there are two options to consider. The guaranteed purchase option1 (GPO) gives the insured the opportunity to buy additional insurance without proof of good health. You also should consider a waiver of premium benefit, which could pay the contract's premium in the event your child becomes disabled.
A Baby Gift That Keeps Giving
Rebecca Jewett, 27, of Bemidji, Minnesota, was just a few months old when her mom purchased a $25,000 life insurance contract for her. Her mom wanted to make sure Rebecca was covered in case something happened.
When Rebecca became a young adult, her mother gave the contract to Rebecca to manage. Rebecca then met with her Thrivent Financial representative to learn more about the contract, especially the guaranteed purchase options (GPO) available. And she began to take advantage of the GPOs.1
In October 2008, just months after she and her husband welcomed their son into the world, Rebecca was diagnosed with thyroid cancer. She's undergone surgery and treatment but is still dealing with the cancer.
"I'm so thankful for my life insurance and that I can continue to increase its value, even with cancer," she says. "It's a good thing I had it."
If you believe: "You buy
insurance to replace lost income. My kid doesn't have any income."
Ask yourself, Can my income cover the cost of a funeral and taking
time off work?
The last thing you want to grapple with in the event of a tragic loss is money. But factor this in: The average cost of a funeral tops $6,000, according to the National Funeral Directors Association. Depending on where you live, that price could jump to more than $15,000. And that doesn't include cemetery costs.
There also will be emotions to work through, for parents and siblings alike. The family may need to spend more time together. They may need grief counseling. They may need to get away. All of this could mean time away from work, which could mean lost income. Insuring your child isn't about replacing an income; it's about helping a family through their time of grief.
What's more, if your child had been sick, there also may be medical or other bills that need to be paid. Many people don't have adequate emergency savings to cover these types of expenses. "As you go through the emotional struggles, you don't want to go through financial struggles as well," Yeiter says.
Multiple Purposes
Christopher and Kimberly Magnuson of Sartell, Minnesota, purchased life insurance for their sons Charlie and Owen shortly after each was born.
"We liked the little savings piece," says Kimberly. "We thought we'd fund it, and when the boys were 18 and needed money for college or a car, there would be some money there." That's what Kimberly did with the life insurance contract her parents purchased for her when she was little.
But on December 30, 2008, Owen, nearly 3, died hours after becoming entangled in the cords of a window shade. He had been alone only minutes when the accident happened.
"As a mom, I think about guns, busy streets, kidnapping," says Kimberly. "I guard the steps, make sure they're wearing sunscreen and that they get their immunizations. I didn't think about the window shades. For something like this to happen is so beyond anything I can reason."
The shades with cords have all been removed; cordless window blinds have replaced them. And the Magnusons are vocal about window blind safety, including directing people to Parents for Window Blind Safety to learn more.
The life insurance proceeds helped pay for expenses incurred by the accident. But most of the funds were put into college savings plans for Charlie and Levi, who was born in July 2009. It was a decision that took them nearly a year to make.
"There is no amount of money that will get you what you want – which is your child back," Kimberly says. "The only reason we took out Owen's insurance was for him to use; now it will be for our other boys. It served a purpose, but not the purpose we intended." 1
If you believe: "There are
better ways to save for my kids' college education."
Ask yourself, Could my kids use the double benefit of life insurance?
If you want to help your children save for college or a down payment on a house, it's true that buying life insurance for your children should not be your top priority. It's actually more important to make sure you have the right life insurance coverage first. After all, what kind of financial support will they have if you're not there? And there are plenty of savings options out there.
But buying life insurance for your children can do double duty, says Yeiter. In addition to providing protection, some life insurance plans offer the ability to grow a cash value in a federal and state tax-deferred way. "This may give your child access to the cash value if they're in a financial pinch, or if they're looking for some extra money to help with college or as a down payment on a first house," Yeiter says.
So while the ability to access cash shouldn't be the primary reason to buy the insurance, it's nice to know it can offer a financial solution when needed.2, 3
Two Benefits, One Family
Stuart and Marcia Obermann of Huntsville, Alabama, know the value of life insurance. The cash value2 in the life insurance contracts their parents purchased for them helped buy their first home after getting married. Then, when they had children of their own, Eric and Lauren, they purchased contracts for each of them.
"It seemed the right thing to do; it didn't cost much, but it gives us a sense of comfort that they are covered," says Stuart.
Little did the Obermanns know what was ahead. Eric, always healthy, developed a speech impediment his senior year in high school, which began a long series of doctors' visits and tests. Two years later, when Eric was a college student at Georgia Tech, they finally got a diagnosis: ALS, also known as Lou Gehrig's disease.
For Eric, the ALS affected the muscles and nerves of his mouth and tongue, eventually affecting his ability to eat and swallow. Then his body began to fail him. Now 28, Eric is a quadriplegic and is unable to care for himself.
Eric's life insurance contract includes both the GPO1 and disability waiver options, both of which the Obermanns have used. "It has allowed us to extend the value of the policy even after Eric got sick and became uninsurable," Stuart says. "Every little bit helps when you're dealing with something like ALS. The out-of-pocket expenses are astronomical.
"I really wish we wouldn't need it, but you never know. You assume you're immortal, that you'll have many years. But things do happen, and they're not always pleasant. But if you're prepared for the worst, it can help soften the blow and at least the financial part won't be as devastating as the emotional."
The Obermanns also have never considered letting a GPO date go by on Lauren's contract.
"Life is uncertain, and you never know what your situation will be in a day, a month or a year," Stuart says. "We are a case study of why it's important to insure children. The majority of children may never need to use it, but then it's a valuable asset to pass on to them when they become adults."
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1 Guarantees are backed by the claims-paying ability and financial strength of Thrivent Financial for Lutherans.
2 Loans and withdrawals will decrease your death benefit and the cash value available to pay insurance costs. Loans and/or withdrawals may cause a contract to lapse or terminate without value. Surrenders may generate an income tax liability and may be subject to a surrender charge. A significant taxable event can occur if a contract lapses with an outstanding loan. Loaned values may be credited at a lower rate than unloaned values.
3 Loans and partial surrenders on contracts classified as Modified Endowment Contracts (MEC) are taxed on a gain-out first basis and may be subject to a 10% penalty tax if made prior to age 59 ½.