Why Whole Life Insurance Works Better for Kids

The chorus that can be heard from financial planners recommending against buying whole life insurance is deafening. Most strongly recommend that you instead use term life insurance. Not only is term life insurance much less expensive, but you can also duplicate the non-insurance features of a whole life insurance policy yourself for less money and with better results.

Fair enough.

That is talking about life insurance for adults; but what about for kids? The pendulum swings back toward whole life insurance when you are talking about obtaining coverage for children.

baby

Photo via Wikimedia Commons.

Premiums are Cheap for Kids

The biggest objection to whole life insurance for adults is cost. At any age whole life is much more expensive than term. This is also true when it comes to kids. Whole life will be more expensive than term, however since premiums are so low for kids in general, whole life is well worth taking a close look at.

Because the likelihood of a child dying prematurely is so remote, you can generally purchase a whole life insurance policy on them for just a few dollars per month. Yes, term life insurance will be even less expensive, but at these prices the non-insurance benefits of whole life become more valuable. Term insurance that expires in 20 years will be worthless. Whole life will continue to accumulate benefits for life.

Locking in Low Rates

When it comes to kids, the biggest advantage of whole life is that you are locking in the premiums for life at extremely low rates. For example, if you can buy a whole life policy on a three-year-old for $300 per year, the premium will remain fixed for the rest of the child’s life.

Imagine having a whole life insurance policy when you’re 50 that costs no more than it did when you were three! That premium will be significantly cheaper than any term life insurance policy that you will be able to buy for the same amount of coverage at age 50.

This will be an opportunity to purchase a low cost life insurance policy that will enable the child to be covered throughout his life at very little expense. As he gets older and his need for coverage increases, term riders can always be added to increase the coverage.

Cash Accumulation and Investment Provision

When it comes to adults, the motto is “buy term and invest the difference”. As an adult you may be fully willing to make your premium payments on a term life insurance policy while also putting money into mutual funds for growth. As a child, that won’t happen for a very long time.

A whole life insurance policy is an excellent passive way for a child to build up savings within a plan that is also providing a life insurance benefit. Cash accumulation and investment value of the policy will continue to grow throughout the child’s life. But by the time the child is old enough to go off to college or to finally enter the adult world, you have an investment asset to help get them started. All that will come about just because you paid the annual whole life insurance premium. It’s an excellent passive way to save money for your child.

Are there other, better ways to do this? Sure, but that might involve maintaining a term policy and investing money periodically into an unrelated mutual fund. For simplicity, you can’t beat a whole life insurance policy for a child. Insurance and investments in one package.

Borrowing in the Future

A benefit of the cash accumulation of whole life insurance is the ability to borrow against it. While the child is younger there may be no need to do this, but as he enters adulthood and starts needing things, he can borrow against the policy at low rates. This can be especially important if he needs to borrow money before he’s established an acceptable credit profile.

Naturally, as a parent you don’t want to encourage your child to borrow money, but it is a nice option to have. There may be some future emergency which loan against the life insurance policy would be the best course of action. In addition, an adult child can borrow against the policy without liquidating it entirely. The policy would continue to serve its major purpose of providing life insurance coverage without being disturbed by the loan against it.

Whole life insurance is generally not right for most adults. But when it comes to kids it’s worth a serious look.

What type of life insurance policy do you have for your children?

Get your life insurance quotes now, or you can also check out these list of insurance companies that can provide you with free quotes:

About the Author

By , on Dec 30, 2012
Kevin Mercadante
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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Leave Your Comment (8 Comments)

  1. Charlie Miraglia, Knights of Columbus Insurance says:

    Whole life from a dividend participating, mutual company gives you growth over the face value of death benefit. What was described in an earlier post is a universal life where the client either gets the cash value or their heirs get the level death benefit. Contrast that with a dividend participating “whole Life”, with a dividend option of purchasing paid up additions, grows both the cash value and the death benefit….You have growth of death benefit and there can be living benefits as well. And I haven’t even gotten into the tax advantages and staying out of probate etc etc etc

    But you have to work with a company that doesn’t pay their dividends to shareholders, they can not match the dividends of mutual companies.

  2. Larry Mestas says:

    With whole life as a life policy is just plain bad, Term life is better. Then invest some cash in a plan for the kid is a better way to go. My Opinion only.

    • Kevin Mercadante says:

      Hi Larry – That’s true as long as you have the discipline to invest the money you are saving on the term policy. If not, that’s where whole life makes sense.

      • Larry Mestas says:

        Whole Life never makes sense when you pass away they keep either or you never get both, don’t believe me look at a policy. I know people that care deeply for their kids and are discipline to invest said money. With Level Term Insurance you pass away your family get the premium and you still have the money that you invested. With whole life When you borrow your own money they will charge you interest to borrow you money from your policy and your policy goes down till you repay your money. All facts not fiction here.

  3. Hi Andrew–They can always take over the payments and keep the plan going. You would be the owner and I’m not certain how it would work legally to change the ownership of the plan. Can you simple transfer ownership or does that involve an entirely new policy at new rates?

    Any insurance agents out there want offer some advice?

  4. Andrew @ Listen Money Mattera says:

    That’s really clever locking it in at a young age, I wish my parents thought of that for me! I’m definitely going to do that for my kids (not born yet). Question though, when they get older, can you transfer the plan to their name so they pay and still not break the chain of payments with the locked in rate. I really want my kids to understand the value of money so eventually they will have to pick up the tab on things like that.

  5. Hi Felix–it works well if you’re looking for life insurance with a savings/investment plan. A solid no-load mutual fund would be better from a pure investment standpoint, but sometimes it seems easier to pay a bill (premium) rather than making periodic voluntary contributions to a fund.

  6. Felix Lee says:

    Whole life insurance seems like a viable option. Although I don’t think many people would be thinking about getting life insurance for their child while they’re still so young. Good points about the benefits though. It is worth looking into.

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