I've always found those flyers that the schools send home in September contemptible. But maybe I'm the one in the dark...?
If the purpose of life insurance is to replace a wage-earner's income in case of death, why would anyone purchase a policy against their child's life?
And why would schools send these home to parents, year-after-year? Am I missing something?
As you say life insurance is about covering the loss of income, so unless your child is an actor or musical prodigy or similar and already earning money, there is no income to cover, and in fact you would have less of a financial commitment without a child to provide for.
The other angle is that child life insurance is cheap and they'll have lower premiums than an adult. I'll quote the referenced article directly to address that:
Another ploy is that children's life insurance is cheap. It is inexpensive compared to adult life insurance because, plain and simply, children rarely die. While the numbers that the sales agent puts together may make children's life insurance sound like a great deal, take the time to run what you'd have if you instead invested the exact same amount used on the insurance fees into a Roth IRA and you'll find the true cost of purchasing this type of life insurance.
Why do people take out life insurance on their children?
They do so largely because it's being sold to them. The insurance companies generally push them on the basis that if you have to pay for a funeral and burial, the cost would devastate a family's finances. In some rare instances that might actually be true, but not generally.
Should I take out a policy on my child?
Generally no. When they sell you a policy they have to dance around a catch-22 - if you have enough money to afford the 'cheap' life insurance, then you have enough money to pay for a funeral and burial that's probably not going to happen. If you don't have enough money to pay those expenses in the rare case that a child does die, then you really can't afford the insurance, even if it's only 'pennies a day for peace of mind.'
And why would schools send these home to parents, year-after-year?
The schools are paid a commission. It is not much more than a fundraiser for them, just like school pictures.
Am I missing something?
Yes, in fact, you could be making money hand over fist if you were willing to prey on parental insecurities. Just set up a stand outside the hospital and get parents who are just about to deliver to sign up for your amazing insurance plan in case the tragic occurs.
My parents and I were suckered into buying this kind of thing when I was in high school. The sales people literally told us that it could be used to pay off student loans - they left out the "in the event of your death" part. We knew it was a life insurance policy, but were told that it would "mature" 6 months after graduation from college, and that it would then be disbursed to pay off loans, even if I didn't die. That seemed strange to us, so we explicitly asked several different ways whether it would pay off the loans after graduation, even if I lived, and they just straight up told us, "Yes."
I'm guessing this ploy is still being used.
Also, last I checked, student loans are non-transferable in the unfortunate event that your child dies - which means the loan is forgiven anyway - so this whole thing seems like garbage to me, at least in the student loan sense.
I would steer clear from this stuff - it's pure snake oil in my experience.
Adam Davis's answer is pretty good. However, I think he misses something with regard to the costs of a funeral. According to funeralplanning101.com, a traditional funeral can cost upwards of $15,000. Having just planned and paid for a funeral for an adult, I can assure you that this figure is low. I've heard "$10,000 - $30,000", and that seems a reasonable ball-park given my experience.
Additionally, grief affects people differently. If your child died, would you be able to continue work afterwards? Most people can, but some people have to take extended leave (generally with no income) because of the emotional impact.
Combined, these expenses can easily outstrip the savings for an average family.
Almost by definition, insurance is not cost-effective; insurance companies profit by selling it to you, after all. But you may decide that it is appropriate to mitigate your risk by buying insurance. I do not have children and would likely not choose to insure them if I did. Nevertheless, other people may reasonably choose differently.
It's Permanent Insurance, sold as a savings scheme that is a bad deal for most people. The insurance aspect really doesn't mean much to most people.
The classic example that's been around for decades is the "Gerber Grow Up Plan". Basically, it's a whole-life policy that accumulates a cash value. The pitch is typically given to grandparents, who kick in $10/mo and end up with a policy that is worth a little more than what was paid in.
Why do people do it?
Like most permanent life, it's usually an expensive investment choice.
Sales tactics for permanent insurance policies can get pretty sleazy. Sending home a flier from school is a way for an insurance salesperson to get his/her message out to 800 families without any effort at all, and very little advertising cost (just a ream of paper and some toner). The biggest catchphrases used are the "just pennies per day" and "in case they get (some devastating medical condition) and become uninsurable." Sure, both are technically true, but are definitely used to trigger the grown ups' insecurities.
Having said that (and having been in the financial business for a time, which included selling insurance policies), there is a place for insurance of children. A small amount can be used to offset the loss of income for the parents who may have to take extended time away from work to deal with the event of the loss of their child, and to deal with the costs of funeral and burial. Let's face it, the percentage of families who have a sufficiently large emergency fund is extremely small compared to the overall population.
Personally, I have added a child rider to my own (term) insurance policies that covers any/all of my children. It does add some cost to my premiums, but it's a small cost on top of something that is already justifiably in place for myself.
One other thing to be aware of: if you're in a group policy (any life insurance where you're automatically accepted without any underwriting process, like through a benefit at work, or some other club or association), the healthy members are subsidizing the unhealthy ones. If you're on the healthy side, you might consider foregoing that policy in favor of getting your own policy through an insurance company of your choice. If you're healthy, it will always be cheaper than the group coverage.
If the child can take over the life insurance when they wish to get a mortgage or have their own children, there may be a case for buying insurance for the child in the event that your child's health is not good enough for them to get cover at that time.
However I don’t think this type of insurance is worth having.
A $10,000 life insurance policy on a child only makes sense for a family that:
Thus, it could make sense:
Many families are in this financial situation. A family in the combination of this financial situation and this emotional situation might be well served to seek religious counsel. If they find ways to remember loved ones without expensive funerals, they could save money on insurance.
Ironically, a much larger life insurance policy for a child might make more sense. Look at it this way: What is the replacement cost of a child?
A family that has only one son (and any number of daughters), or a family that has only one daughter (and any number of sons), stands to lose an obvious part of their genetic and cultural legacy if they lose that son or daughter.
It is expensive to conceive, bear, and raise a child to a particular age. This cost increases as the child ages. The number of years of child-raising cost obviously increases. Also, the cost of conceiving another child can go from very small to very large (especially if fertility treatment or sterilization-reversal surgery is required).
Unfortunately, most life insurance companies do not think of things this way. I am not aware of any 100,000 - 250,000 dollar children's life insurance policies on the market.
Thank you for your interest in this question.
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