How Young Is Too Young? Life Insurance And Children

By Edward C. Auble

I would like to begin with a personal story.

My brother George was born when I was six years old. But he had a respiratory condition and lived only 19 days.

Shortly after George's death, my father purchased life insurance on my sister and me. I can only assume that the $1,000 benefit was intended for our possible final expenses, a risk not covered when George died.

Why should a parent consider purchasing life insurance on a child?

Final expenses, yes, but in the overall picture, final expenses are of smaller concern than other financial issues.

A child born today attains college age in about 18 years. Today a private college costs, say, $250,000. By the time that baby who is born today matriculates, parents are viewing a $500,000 college bill per child. What loans will they incur, loans which could be protected with life insurance?

The child becomes an adult. The parents have transferred ownership of the life insurance to the child. The now-grown child is earning an income and has a responsibility to pay the premiums.

The grown child turns 25 and gets married. Their annual income is, say, $50,000. How much life insurance is needed to replace this income? Looks like time for a little capital needs analysis.

Their first child is born a couple of years later. Now we have another person to protect, including paying for their education. And shortly thereafter, they have another child. And the story doesn’t necessarily end at Child No. 2.

Now there are too many family members to fit into apartment so the couple purchases a home. They need to buy more insurance to cover the mortgage.

The main breadwinner is now 35 years old and their income has increased dramatically.

And, now, they purchase a business and …

What Are The Guidelines?

Each insurer has guidelines on when and how much life insurance can be purchased on a child. The child may need to be at least a few days old. The amount of insurance on the child may not be more than the amount the parents have on themselves. There may be an upper limit on the amount of insurance. Who may sign the application? How much insurance does the state allow on a minor?

Here are two important takeaway thoughts. First, the premiums on a young child are extremely low. Significant amounts of insurance for long periods of time are feasible. Second, in purchasing life insurance on a child, you guarantee their insurability. As the scenario above suggests, there are a number of moments in someone’s life when insurance – and additional insurance – is needed. It is sad when insurance is needed and the potential insured is uninsurable.

Here is an example of a need. A retired professor noticed that his friend’s son had significant college loans. We provided a $100,000 term life policy on the young man for an annual premium of $82. In the event of his death, his mother’s debt would be erased.

Now, here is an example of what a grandparent might provide for a grandchild: consider a $250,000 indexed life insurance policy on a five-year-old grandchild. To avoid having a modified endowment contract, the grandparent pays about $250 monthly for seven years. At when the grandchild turns age 65, the death benefit would be about $680,000 and the surrender value about $375,000, assuming current rates of return. The surrender value can be accessed with policy loans. There would be no income tax paid on the loans. At death, the death benefit is net of any loan.

So, what is an advisor to do? First of all, as this article indicates, there are needs - and wants – to provide life insurance on a child. Keep the child(ren) in mind when you are doing comprehensive planning. Your clients and prospects need your thoughts and your expertise.

Edward C. Auble, CLU, ChFC, MSFS, FLMI, LUTCF, CASL, joined AIG in 1972 and managed overseas operations, primarily in the Caribbean and the Middle East. He is past president of NAIFA-Pennsylvania and owner of Auble Financial in Paoli, Pa. Contact him at [email protected].

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