Don't Fall for the Life Insurance Industry's Juvenile Trick

 

Don't Fall For The Life Insurance Industry's Juvenile Trick


Would you buy a car for your four-year-old child just because they might need one when they get older? Of course, you wouldn't. But, you know what? Insurance companies want you to do something just as incongruous. Believe it or not, many insurance companies want you to buy life insurance for children, just in case they might need it when they get older.

You’ve probably seen the ads on television that artfully target parents and grandparents, encouraging them to buy life insurance for children. Of course, the insurance companies don’t emphasize they are selling life insurance on children. Instead, they cloak the pitch with terms such as a “get started plan,” a “grow up plan” or the favorite, as a “college plan.” No matter how it's couched by the insurance companies, the objective is to make an easy profit by preying on the love of parents or grandparents to sell unneeded life insurance on children.

Now, don’t get me wrong, I have nothing against life insurance. After all, I started my career as an agent selling life insurance and ended up as president of one of the largest life insurance companies. I spent my career trying to peddle as much life insurance as I could, but one tactic I always thought was wrong was trying to sell life insurance on children.

Life insurance is best when used for its intended purpose. 

Life insurance can be a valuable part of any financial plan but only if it is needed and can serve a useful purpose. The only valid rationale for life insurance is to cover any economic loss that may occur in the event of the death of the insured. Life insurance proceeds can replace lost income for a young family and pay off a mortgage or other debts. It can also stabilize or monetize a small business if a key player should die. 

The point is, if no one will experience an economic loss as the result of an individual’s death, there is no need for life insurance. Parents and grandparents will certainly suffer an emotional loss at the rare occurrence of the death of a child, but rarely will this create a debilitating economic loss for the parents or family. 

Even insurance companies understand how macabre it is to focus on economic benefits derived from a child’s death, so they take a different approach. Companies selling juvenile life insurance stress that the policy is a “grow up plan.” The idea is that when the child grows up, they will already have life insurance at very cheap rates and this could be important if, for some reason, they can’t qualify for life insurance when they need it. That sounds nice, but the reality is that a vast majority of individuals are able to qualify for life insurance well into middle age. Why buy and pay premiums on unnecessary life insurance for an unnecessary reason? 

Insurance companies like to suggest that buying whole life insurance for a child is a good way to begin to save for college tuition. It is a good idea to start saving for college when a child is young, but buying whole life insurance is one of the least effective ways to do so. It is true that a whole life policy on a child will, over time, build up a certain amount of cash value, but because the policies are so small (usually $10,000 or less) the amount of cash that will accumulate in the policy by age 18 generally amounts to no more than $1,000. (Even insurance companies limit the amount of life insurance they will issue on a child, lest there is some perverted incentive if the child becomes worth more dead than alive.) The truth is there are many better ways save for a child’s education than buying an insurance policy on their life. 

Put your money where it counts 

The reality is that most parents are underinsured relative to the economic plight that will befall their family if either of the parents dies. Rather than wasting money buying unnecessary life insurance on a child, those funds should be diverted to buying life insurance on the parents where the insurance is most needed. 

If grandparents really want to express their love for their grandchildren, they could better do so by providing the funds to buy life insurance on the parents. To judge the value of buying life insurance on a child against purchasing insurance on the parent, simply compare how much life insurance the same premium will buy on the parent (using a 5- or 10-year term) with the death value of the child’s policy. The result may surprise you -- but, more importantly, it will clearly show why parents and grandparents should not fall for the insurance industry’s juvenile trick to offer life insurance for children.

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Bob MacDonald -- Founder of LifeUSA, retired chairman and CEO of Allianz Life of North America, author of personal development, business and management books. bobmac5201@gmail.com

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