The main function of life insurance is to provide protection and security for dependents when the head of the household dies. Therefore, it is meaningless to buy a large amount of life insurance for the newborn, because no one is financially dependent on the baby. However, purchasing a smaller policy for babies can provide advantages in certain situations, such as funeral expenses in the worst case.
- Since life insurance compensates the family for losing the breadwinner, in most cases, insurance policies for infants who have no income are meaningless.
- However, a small insurance policy about the life of a child can be a way to pay for expensive funeral expenses or unreimbursed medical expenses.
- Many adult life insurance policies provide child passengers with a monthly fee of only a few dollars.
How life insurance works
First, get a quick introduction to insurance. If the insured person dies during the effective period of the policy, the life insurance policy will pay a sum to the designated beneficiary. The owner of the insurance policy usually pays the premium monthly to keep it effective.
The two main types of life insurance are term life insurance and whole life insurance. Term life insurance is only paid when the insured person dies within a specified period (for example, 10, 20, or 30 years). If the insured exceeds this period, the policy will expire without payment, or in some cases, the owner can convert it to whole life insurance. As long as the premium is paid, the whole life insurance policy will remain in effect.
Since most term life insurance policies never pay death benefits, premiums are much cheaper than life insurance policies, which are always paid in the end (unless the policyholder makes them lapse). For example, a 30-year-old non-smoker in Florida can get term life insurance for US$100,000 for about US$9 per month, covering 20 years. A lifetime policy with the same death benefit will cost him $50 or more per month.
Although term life insurance provides the most protection at the lowest cost, some people prefer whole life insurance because it doubles as a tax-friendly savings tool. Part of each premium goes to an account that increases over time. The amount in this account is called the cash value of the policy. Policyholders can borrow the money and even redeem their insurance policies, effectively giving up the death benefit.
Historically, the rate of return on whole life insurance has been low, which is why many investors are more willing to pay cheaper term life insurance premiums and invest the difference in mutual funds.
Baby and life insurance
At first glance, infant insurance may seem counterintuitive. Life insurance is meant to compensate people who have lost breadwinners, not babies. Family financial experts recommend buying enough life insurance to protect dependent children until they reach adulthood. For example, a person with an annual income of US$100,000, whose youngest child is 10 years old, needs a life insurance of US$800,000 to provide life insurance to the child until the age of 18.
Because babies have no income, no one lives on them. Although it is tragic for parents to lose their children, it has little economic impact: a family will not face the loss of income from the baby. For this reason, one might argue that purchasing a life insurance policy (even a relatively cheap term insurance policy) for the life of a baby is unnecessary and a waste of money that could have been used for more useful expenses, such as college Savings.
In addition to the direct financial benefits, purchasing life insurance for your children can also help pay for consulting fees, vacation expenses, and other expenses related to the premature death of a loved one, leaving more room for the grief process and emotional recovery.
When baby life insurance makes sense
However, there are some strong arguments for buying at least one small life insurance for newborns. The first is to have money available, just in case the worst happens and the child dies young. To quote the playwright Tennessee Williams, death is expensive and is increasing every year.
As of 2021, burial procedures and costs are usually between US$7,000 and US$12,000; today’s average funeral costs are approximately US$9,000, which is much higher than the approximately US$6,000 in the early 21st century. The death benefit of a child’s life insurance policy can cover these sad expenses. In the case of long-term illness, it can also compensate parents for medical expenses not allowed by their health insurance, helping them avoid heavy debts.
In addition, the younger the insured, the cheaper life insurance. Some parents prefer to lock in low insurance premiums so that babies can provide themselves with cheap insurance as adults. It is usually more economical to add to an existing policy than to buy a new one.
In addition, many adult life insurance policies provide child passengers with a monthly fee of only a few dollars. If buying protection brings a little peace of mind, why not? Even if this is a claim that no parent does not want to honor.