How do you pick an insurance company to buy a whole life policy for a child? Are all policies equal? Do all whole life policies earn value? And, are all life insurance companies the same? What should you watch out for?
I guess one thing is to buy from a long-established company. I know from my own experience Gerber and Grolier sold life insurance, and I imagine they still do (and looking into what they offer today would be a good place to start). But, I’d like to hear what others have to say.
My question is why do you think you need life insurance for a child?
Because for children 17 and younger, everything is in their favor for a nice investment when they are older. A medical exam is not required, and as such rates are low. A whole life plan will grow with them in time to a nice little nest egg, and they can borrow against it, if needed, should the time come…like college, a nice down payment for a car, etc.
You borrow against it, then you have debt. (even if balanced by the asset) If you cash it out, then you have income to pay taxes on. In my opinion you’re much better off with a 529 plan or just any traditional investment. Whole life insurance is expensive insurance (and not needed by children) and generally a poor investment. However, my agent at LARGE ESTABLISHED INSURANCE COMPANY (who I trust) has advocated such an investment many times, and showed me historical returns which were safe and not too bad. I never went that route, however.
So, to answer your question, I’d pick one that has a long track record, and isn’t in the baby food business. Met Life, NY Life, Northwestern Mutual, Mass Mutual, etc.
So why not just fund an investment account for the child, perhaps in a 529 plan?
Agreed.
Life insurance for a child is bad insurance because they don’t have dependents to support, and a bad investment because it’s insurance and you pay a hefty sales load on it.
Just buy an index fund in a custodial account and give it to them when they’re 18.
A 529 plan is VERY limited. The money in such a plan MUST be used for education expenses, or else you pay a penalty on every dollar you take out. A life insurance policy doesn’t have restrictions like that.
OK, so why not just a taxable custodial account as suggested upthread? Why pay the sales load associated with a whole life policy? Why is the insurance component even necessary?
I’m not a financial advisor. But I believe most legitimate ones (fiduciaries) will recommend you stay far, far away from “whole life,” “universal life,” etc.
There are good ways to help your children invest for their future, but buying a life insurance policy in their name is not one of them.
Certain medical conditions make insurance expensive or not available at all. Getting a policy on a child ensures they have coverage if they develop one of those conditions (ie. Type 1 Diabetes) for when they are older & have dependents.
One can also get a small rider on the adult’s policy which could cover funeral expenses in the case of a tragic death; I had one on a term policy, it was literally pennies because of both the young age & the nominal ($10 or 20 thou) payout amount.
In many cases, anybody who offers such advice is either (A) still stuck in the mindset of the 1980’s or earlier regarding life insurance, or (B) thinks that they can override the typical human patterns of behavior. An example of the latter is the memorable slogan, “Buy term and invest the difference.” Millions of people bought term insurance – but they didn’t invest the difference. As an acquaintance of mine says, “They bought term and bought pizza.”
And then there are the people who are just plain ignorant of the multiple advantages of whole life, such as bypassing probate. Any so-called “fiduciary” who dismisses whole life out of hand, without at least mentioning those advantages, is anything but a fiduciary.
Whole life is a bad idea. I’m lazy today so I’ll just link to this article:
Here’s Why You Should Avoid Whole Life Insurance Like the Plague
mmm
I agree that human behavior often means a sub-optimal strategy may sometimes be better. It could be that in the end, the consistency of having to pay a life insurance premium bill every month means that there is more available than if they had to remember to make deposits into a savings or 529. And even if they put money into a savings account, there’s no guarantee that it won’t be spent on a new boat or vacation instead. There should be the acknowledgement that this sort of tradeoff is being made with investment performance. Whole life is a generally poor investment compared to others. But the investment behavior of the particular person may mean that they are more likely to save into whole life compared to other investment options.
A good option for setting up regular investing is to have automatic withdrawals from your bank account. Treat it like a monthly bill. Rather than paying $$$ to the insurance company, auto transfer that $$$ to a savings, investment, or 529 college account.
The benefit about avoiding probate with life insurance can also be done with financial accounts. The accounts can have beneficiaries named. Just like a life insurance policy directs the payout to beneficiaries, the same can be true for your bank and investment accounts. You can generally setup beneficiaries at any time through your online account management. This should be done by everyone since it avoids a ton of headaches when your estate is settled.
Seven years ago when my mom died my brother acted as executor. He, my sister, and I divided up small possessions and such amongst ourselves. After all the bills were paid, there was ~$15,000 left. My brother suggested that we put the money into a 529 plan for my sister’s granddaughter (our mother’s first great granddaughter).
My brother has managed the plan and sends us yearly updates. In 2021 the money made 15.6% interest and has tripled in value since the plan was set up. There are fairly strict regulations that were set up by my bro. If the girl fails to graduate high school by a specific age/date, the money goes to us. Likewise, if she decides to not attend a college or university, the money goes to us (and we have to pay all the taxes, of course).
Don’t tell my brother I said this, but I think it was a fantastic idea.
Yes, there’s a difference between acknowledging that for a particular person whole might be better because they won’t save the difference and saying that whole life is optimal. But something I never seen mentioned is that people who buy whole life policies can cash them in early ( possibly paying surrender fees) and use the proceeds to buy the same car or boat that they might have spent the savings on.
One thing that not everyone is aware of is that the 529 allows you to change the beneficiary to someone else. It doesn’t have to be used on the person specified when the account was established. If this granddaughter doesn’t go to college, the 529 can be directed to a different grandchild, you and your siblings, etc.
And actually you don’t have to change the beneficiary and transfer the whole balance to that person - you can open an account for a qualifying relative of the beneficiary and transfer just some of the money. For example, grandparents might open and own an account for the first grandchild and when a second one is born , they can transfer just some of the funds to an account opened for the second grandchild.
Kids don’t need whole life insurance. It remains just about the single worst thing to do with money that you are trying to use productively. Commissions are high, the insurance is of little value, and there are better ways to invest the money. Sure, every once in a while a term insurance policy for a kid pays off. Of course, every once in a while, a lottery ticket does so even more.
Is your “acquaintance” an insurance salesman by any chance?
There are many ways to bypass probate. Cheap and easy ways are to put it in an IRA (kids with earnings can open them, no matter how young) or a transfer on death financial account. A more sophisticated way is to put the assets in a trust but it isn’t necessary to skip probate.
You can set up accounts to invest automatically. No remembering necessary.
That’s a semi-balanced article. But this part stood out–
Even if you were to invest your $2,500 annual savings more conservatively, at a 3% average annual return, you’d be sitting on about $119,000. And as long as you’d invested that money in an IRA or 401(k), you’d get the same tax-deferred growth that a whole life policy promises. In some cases – namely, a Roth IRA or 401(k), that growth will actually be tax-free.
Guess what? Money that you put in to a whole life policy will (A) grow tax-deferred; and (B) you can ALSO take it out tax-free! And (C) when you die, your heirs can get that money tax-free as well!
Even analyses of the issue of whole vs. term that make an effort to be fair and balanced often stumble over the tremendous tax advantages that whole life provides. Sure, you can make more money on an averaged year-over-year basis by putting your money into the stock market, but in most cases, you’ll owe a bundle in taxes when you take it out.
Another issue where such analyses fall down flat is the issue of fear. They just plain don’t bother to take it into account. A surprising number of people are AFRAID to invest their money in the stock market in any form whatsoever.
In 2000-2002, the S&P 500 had 3 straight years of losses (10, 13 & 23% respectively). People said, “It won’t happen again.” Then in 2008, the S&P 500 lost 38%. And people began saying, “When will it happen again?” There are millions upon millions of people who are DEATHLY AFRAID of the stock market. Telling them, “There are better investments than whole life” is a fool’s errand. They have their money in the bank, not in investments. Life insurance offers safety and assurance. It offers a chance to invest without risk.
The secret to making life insurance on babies worthwhile is fairly straightforward: