Did that cute baby in the life insurance commercial catch your eye? Did the words “cash value” make you swoon? Did the phrase “pennies a day” make you shake out your pockets and think, I should take out a life insurance policy on my child? Before you get caught up in all that marketing, let’s take a look at what taking out a policy on your child gets you.
Premiums And Fees
Most of the life insurance for children sold are whole life policies. This means the premium stays the same for the entire life of the policy, but it tends to have higher premiums because it’s guaranteed throughout your child’s lifetime. Whole life insurance sets aside a portion of your premiums in what’s called a policy’s “cash value,” a big selling point for companies. This set-aside portion accumulates in an account invested by the company. When your child turns 21, they can choose to continue the policy into adulthood or opt for the cash that’s built up.
So what’s the catch? Well, there are two. Fees can lessen any value accumulated in the policy even with a great return if your child chooses to take the cash to pay for education, a house, or anything else. Surrender charges can oftentimes start at 10%. (1) And what exactly is that accumulated portion being invested in? If you scour the cute baby life insurance company’s website, it doesn’t lay out how they invest the cash built up in the policy. Cuteness, yes; transparency, no. Yes, buying life insurance for your child is an easy way to save for education and have protection if something should happen to your child. Just set it to auto-debit and forget about it. But there are so many other ways to do the same thing just as easily, more affordably, and with more control.
Alternatives To A Life Insurance Policy
There are some alternatives to taking out a policy on your child. If you are worried about funeral expenses and medical bills, then adding your child to your term policy is an option. Premiums are usually not cost-prohibitive (typically $5 per $1,000 unit per year). (2) Also, there are several ways to save for your child’s education that let you control how it’s invested. 529 plans allow your dollars to grow tax-free; in some cases, you can deduct it on your state income tax return, and you won’t pay federal or state taxes when you make a withdrawal if the funds are used for qualified educational expenses. (3) You can also choose the investments in a 529 plan from a selection provided by the administrator like mutual or index funds. Other options include UTMA or UGMA custodial accounts, which children are unable to access until they are adults. Depending on the type of account you select, there are a wide array of investment options, and a UGMA allows you to even hold real assets.
There are some reasons to have a life insurance policy on your child. If your child is ill or has major health concerns that could affect their insurability in the future, then of course life insurance is an option. If your child is added to your policy on a rider, they can oftentimes be converted to their own policy when they reach adulthood.
Better Options
There are many ways to plan for your children’s expenses, but life insurance might not be a good fit, especially with options like 529 plans and its tax benefits in the mix. We at Hayden, Biel & Associates can help take a look at your child’s future and decide if life insurance is right for them and you.
Contact us by calling (626) 529-8347, or email me directly at ricky@hbawealth.com so we can talk about your concerns and your options.
About Haydel, Biel & Associates
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com
The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Haydel Biel & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Haydel Biel & Associates or performance returns of any Haydel Biel & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Haydel Biel & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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(1) https://www.investopedia.com/terms/s/surrendercharge.as
(2) https://www.policygenius.com/life-insurance/how-do-child-riders-on-life-insurance-work/