Congratulations! You just had your first child. So, why are you suddenly getting messages and advertisements encouraging you to choose one of the best child life insurance plans? Yes, child life insurance is a big industry product, no matter how grim it is to think about infant mortality.
On the bright side, you usually don’t buy life insurance on a child to plan for funeral expenses, and that is not where most insurance agents want your frame of mind. The best child life insurance plans are vehicles for your baby’s financial future. Allow me to explain:
Why people invest in the best child life insurance plans for their kids
When considering the option of a child’s life insurance policy, you are almost always discussing permanent policies. The biggest advantage of these policies for a child is that they also operate as a savings account over time. As they build value, loans can be taken from the account as if you are acting as your own bank. This can be valuable as an alternative to using car loans or other private loans as long as you build up enough cash value in your policy.
The downside of this thinking is that the cash value in these life insurance policies builds very slowly. In many cases, the cash value will not even equal the amount of money paid in premiums until somewhere between year 7-10 in the policy’s life. The most significant cash value growth is usually not seen until 20 years or more into the policy’s life.
The length of time it takes to see growth can be advantageous to a child’s policy since they wouldn’t have control of the policy until 18 years of age. By default, they are starting in a place where they will begin to see more growth.
Understanding characteristics of the best child life insurance plans
Fees that come along with life insurance policies eat away at the policy’s opportunity for growth. Your agent usually won’t tell you that the riders and extra features are usually unnecessary and undermine the policy’s cash value over time. But it does put more money in their pockets since each additional feature increases your monthly premiums.
Anyone thinking about a child’s life insurance policy for cash value growth should focus entirely on the goal of cash value growth. Don’t add a bunch of riders that will bring additional fees and hurt your cash value growth. Zero riders on your policy will get it to the break-even point faster and you will see real growth sooner.
The other factor you will want to look for is something that few agents ever talk about and barely any know about. It is called non-direct recognition. This is a feature in a policy that changes the way it grows. The cash value of a policy grows (in part) based on the length of time the policy has been in force, and the current cash value that is in place. When you take a loan from the policy, the size of that cash value changes. What a non-direct recognition policy will do is pay you dividends as if you never borrowed any money at all, even if you haven’t paid it back. If your policy is direct recognition (as many are), it will recognize the lower cash value and pay you a lower dividend as a result.
A child life insurance policy is not as evil or as foolish a plan as some advisors will make it out to be. It is also not as great a tool as some will try to convince you it is. The best child life insurance plans can be useful when implemented correctly. Just be aware that the only policies you should consider are non-direct recognition policies with zero or minimal riders added. Otherwise, don’t do it.
What has your experience been with child life insurance?