18 Dec Is life insurance for children a scam?

Q. I have a newborn and a five-year-old. I keep getting mailings about buying life insurance for the kids. I think it’s scammy. What do you think?
— Dad

A. Scammy isn’t the right word for it.

People often buy life insurance to replace the income of a breadwinner.

Unless your child earns income and supports your family, you may not need the policy.

But there are reasons when a policy could make sense, if you have the extra cash in your budget.

Whether you should buy should be based on your financial objectives, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

First, he said. there are many “whole life” imitations out there. Provided you purchase a pure whole life policy, preferably from a mutual life insurance company, juvenile whole life policies can be a great idea, he said.

Gaelick said there are many advantages.

“Policies lock in premiums at a young age for life, share in the insurance company’s profits in the form of dividends, build cash value that is not subject to market risk, have guarantees, have tax advantages, values are protected from some creditors, can supplement retirement benefits and provides a death benefit that will increase over time keeping pace with inflation provided the policy is set up properly,” he said.

Your child will have a policy in place when life insurance becomes important to them at some point in the future, Gaelick said. They will also then own a financial product that has already accumulated cash value.

Accumulated values can be used for any reason, Gaelick said, including to to pay for college, to purchase a car, for a down payment on a home, for an investment property, to fund a business venture, and more. There are no limitations, he said.

“There are several ways to use the values and many factors should go into that decision,” he said. “You could surrender some cash value, borrow against the values or a combination of both. You could take out current dividends. Many that own whole life simply let the values increase and accumulate.”

Gaelick said whole life premiums are really attractive at a young age and there are no premium increases.

“So by purchasing a policy for your children, you lock them in,” he said.

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