Kiddie Insurance - Good Idea/Bad Idea?

My experience would suggest that most individuals in the financial world chase the ‘Big Fish’ rather than working with the majority of other fish in the sea. As a result, most of the concepts that are employed by salespeople are really not appropriate for the general consumer. Today, I will speak about the need or lack thereof for insurance on a child.

When I started in the financial world two decades ago, I was trained that the sale of life insurance on a child was an easy sale and you only had to play on the emotion of the parent to complete the sale. It did not take long for me to realize two fallacies of life insurance on a child. First, insurance is not the best place to start saving for anything let alone education and second, putting a lump of insurance on a child without addressing the parents’ needs first was a serious blunder for the well-being of the family.

The typical sales process involves a product peddler taking a set monthly amount, usually tied to a child tax benefit amount, and using the whole amount to set up a permanent insurance contract. The sizzle to the transaction is that the money that grows inside of the policy does so without incurring any tax on the growth and in the event that the child dies prematurely, the parent can properly grieve the loss without taking a loan out to finance the funeral – phooey.

First, a good portion of the premium is used to pay for the insurance costs so the remaining amount, regardless of tax treatment, will grow to a lower amount when compared to almost any other savings vehicle. With the recent addition of the Canadian Education Savings Grant (CESG), the difference is magnified as life insurance does not qualify for the 20% grant the government awards on the first $2500 per year of education savings. Yet, just a few weeks ago I had someone inquire about the benefits of saving using insurance as a friend of hers had been raving about what she had done for her child.

Second, in the two decades plus that I have been in the financial world, I have met more than one set of parents who have lost a child. The one thing that they all have in common is that no amount of money would have changed one iota of the grieving process. All that the money would do is to pay for the funeral costs and then be used to establish a fund of some sort in the child’s name. The insurance proceeds have never been used to allow a parent to take a paid holiday.

Third, if a parent(s) have a limited budget with which to address their own insurance requirements, taking any money away from that to put toward a child is inane. Taking $30 per month and insuring a parent will go a lot farther to assist that family in the event that a parent dies than the value inside of a kids plan. Moreover, if you are looking to save for a child’s education, do so with an RESP or another explicit savings vehicle, not insurance.

Does this mean that insurance on a child should never be implemented – absolutely not. But before it is, make sure that the parent(s)’ needs are met properly and that there is a savings plan in place for the education. If that is the case, and you are going to take out insurance on a child, make sure to include the ability for that child to get more coverage later in life regardless of health or vocation.

Want to learn more, just drop me a note at bshumak@bshumak.com

Cheers