Is it recommended to buy whole life insurance for a child?

Question

A friend of mine recommended buying whole life insurance for my child. He said it was better than investing elsewhere. For example, you can get a 1 million dollar insurance which will be paid up by the time he is 18 at an annual rate of about 4500$. And this money grows to over 5 million when is 65 and is tax free. Withdrawal can be done at any time. What's the catch?

Thanks everyone for the response. I see that the recommendations lean towards not buying it. Strangely enough, I was told that it is very common among families that have lived in this country for over a couple of generations and it's the immigrants who don't understand the benefits of this insurance.

Answer 1

Most families rarely buy life insurance on their children. If they do buy life insurance on the child. it is usually because of the environment surrounding them or some sort of medical condition that the child has. For example, if you live in a high crime neighborhood, then there's a high risk of someone getting killed. If your child has asthma or whatever disease, then there's a high risk that the child can die if the child doesn't take his/her medicine. Families who buy life insurance on their child only buy $10,000 worth of coverage. In some states, they only allow a maximum of $20,000 coverage on a child.

Anyway, your friend is not a very good friend if he is selling you a whole life policy. Whole life policies are the most expensive life insurance product out there. Whole life insurance contains two elements: the insurance element and the savings element called cash value. Your cash value grow tax-deferred and you are guaranteed to have this much premiums at a certain age. When your child reach 18, he can use it to pay for college. When he reach age 30, he can use it to buy a home and so on. I bet this is how your friend sold it to you. But here's the catch of whole life insurance.

While your cash value does grow tax-deferred, in the first two years of the policy, no cash value is accumulated. After that, it only grows about 4%. It is true that you can use the cash value at anytime, but you have to borrow it with a loan interest of 5-8% The cash value will never be worth more than the coverage amount until you hit age 100. My parents own whole life and been paying 25 years on it. They bought it age 30 and they were 55 years old when I took a look at their policy. For $30,000 coverage on both of them at age 55, only $10,000 was sitting in the cash value in each policy.

Your life insurance is never paid up unless you choose a payment plan where you pay only a certain amount of years into the policy such as 20-Pay Whole life. The shorter the payment period, the more premiums you need to pay. Most people choose to pay continuously for life because the premiums are lower.

So, if you are looking to buy life insurance on you and/or your child, choose term insurance. You probably have a homeowner insurance, health insurance, and auto insurance right? Does any of these insurance have a savings plan in it? Then why does only life insurance have it? It's because it generates big profits for the insurance company. Term insurance is just strictly insurance, therefore it is cheaper than whole life insurance. Since it's so inexpensive, you have more flexibility to invest the difference. To see the comparison cost between whole life and term insurance, go here: http://obe231.blogspot.com/2006/11/comparing-whole-life-with-term.html

What should you invest in? Have you heard about Roth IRAs? Roth IRAs grow tax-deferred and withdrawals after age 59 1/2 are tax-free. That means you don't have to pay any taxes on your Roth IRA. Most IRAs are funded by mutual funds. Mutual funds is an investment company that invests your money in company stocks. Stocks represent ownership of a company. Mutual funds invests between 25 to over 100 companies, therefore there is a low risk that the mutual fund will lose lots of money if one company goes bankrupt. Mutual funds are also professional managed. That means you don't have to worry about when you should buy or sell stocks or how to manage your mutual fund. For more info about Roth IRAs, go here: http://obe231.blogspot.com/2006/12/individual-retirement-account.html

As for your child, if you want the child to go to college, setup a 529 plan. 529 Plans are state plans where your investments grow tax-deferred. Unlike custodial accounts where you give up your control when your child reaches age 18 or 21, you have complete control over the assets for life. That makes sure your child uses the money for college. For more info about 529 plans, go here: http://obe231.blogspot.com/2006/12/529-plan.html

Answer 2

First and foremost - be absolutely certain that there is sufficient life insurance on the parents, since that is where the biggest risk of financial loss rests.
I have been in the investment/insurance business for more years than I would care to admit...and have always purchased policies for my children right after they were born. The cost will never be less and underwriting is simple.
It is imperative, however, that you be sure to add a rider that gives the child the opportunity to purchase more insurance in the future at specific times, with no medical questions asked. In my opinion, this is the biggest benefit to insuring a child. I have one son who was born with a heart problem, and because of this rider, he is able to get more life insurance that would either not be available to him or would be extremely costly.
Personally, I don't view these as investments - you can only count on what is available in the quananteed column of the illustration of future values. Withdrawals are not always tax free - there are limitations that you should check out.
Better investment idea is a Roth IRA, which has better tax advantages, and if invested in a good growth mutual fund, should be able to provide a substantially higher return than insurance does.....and yes, a minor can have an IRA. Instead of n allowance, actualy "pay" them for mowing the lawn, shoveling, gardening cleaning, etc - this becomes earned income and can then be placed in the IRA. If you own a business, there are even more creative ways to pay a child. Your accountant can help here. Sorry for the lenghth of this, but you really should get a second opinion from someone who doesn't just sell life insurance for a living.

Answer 3

OK, let's do the math. If you invest $4500 a year for your child, at a modest 8% (good mutual funds average 12%), after 18 years you have. . . 193,585. If you stop investing then, and just let it sit, when the child is 65, they will have . . . $8,211,000. That's with interest compounding ANNUALLY, not MONTHLY. In the real world, interest compounds monthly, so it would actually be higher.


If you use the mutual fund average of 12%, then your returns are actually $310,196 and $84,896,000. Yep, that's not a typo - Eighty Four Million Dollars. Trust me, he won't mind paying taxes on the income from that.

The catch is, that's how much income the insurance company is going to get from YOUR investment - oh, 84 mil MINUS the 5 mil that is NOT guaranteed. Paid up insurance only STAYS paid up, while it generates enough interest to keep paying premiums. Then it starts borrowing from the cash value, and when THAT runs out, they start sending you a bill. Happens in down markets.

You're better off investing on your own. Don't have a good mutual fund you like? Pick a mid cap stock index fund.

OH, and the withdrawal can be done at any time, LOL.

Answer 4

I might suggest one to visit this web site where onel can get rates from the best companies: http://COVERAGEFINDER.NET/index.html?src=2YAwrirwFS21

RE :Is it recommended to buy whole life insurance for a child?
A friend of mine recommended buying whole life insurance for my child. He said it was better than investing elsewhere. For example, you can get a 1 million dollar insurance which will be paid up by the time he is 18 at an annual rate of about 4500$. And this money grows to over 5 million when is 65 and is tax free. Withdrawal can be done at any time. What's the catch?
Update: Thanks everyone for the response. I see that the recommendations lean towards not buying it. Strangely enough, I was told that it is very common among families that have lived in this country for over a couple of generations and it's the immigrants who don't understand the benefits of this insurance.
2 following 12 answers

Answer 5

Rather than buying life insurance for a child, I would suggest setting up a 529 (tax deductible education savings) for your child. There is no premium on your investment which you would have to pay with whole life insurance. Other forms of investing are actually better values. I think the catch that you are looking for is that you have to pay a high premium and there is not a lot of cash value until many years down the road. Insurance agents also make a lot of commission off of whole life insurance policies.

You can also check out this site...maybe there are some articles/info. that can help you decide. http://insurance.divinfo.com/

Answer 6

The policy you mention is not intended to be an investment vehicle, & they're correct, it's not a good choice. Some of the other details aren't completely accurate, but don't warrant correction as you shouldn't consider doing this.

HOWEVER, the statement that you never insure a child isn't true if you are buying to fill a need....which is what life insurance is all about.

It's not uncommon to buy a small policy (under $10,000) just in case the unthinkable happens to this child, & the parents don't have the resources to pay for a funeral or the associated expenses.

Sometimes a grandparent will purchase a small "just in case" policy like this as a gift for a newborn.

Answer 7

The best time to buy Ins. is for your child, lower rates and more time for the money to grow. It may not give the best returns, but it is the safest.

Answer 8

A very bad investment. You never insure a child ... you only insure the breadwinner. You'd be a lot better off opening a high-interest money market account.

Answer 9

Yes. (Just enough to cover the funeral)

Answer 10

Here is your answer:

http://www.daveramsey.com/the_truth_about/life_insurance_3481.html.cfm

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