Does it Make Financial Sense to Buy Life Insurance for Children?

Back in June 2008 I took a look at the Gerber Life Insurance Grow-Up Plan after seeing a TV commercial. I suppose with one kid jumping off the couch and the other one horsing around near the light socket that perhaps I could have been immediately drawn to the plan. But does the average kid really need a life insurance policy? Since 4 1/2 years have passed by, let's take another look.

The plan is summarized at  It is a whole life policy with coverage ranging from $5K to $50K ($35K in 2008).  You can purchase a policy for your kid or grandkid anytime between the age of 14 days to 14 years (the high end was 12 years in 2008). At age 18 (previously 21) the policy automatically doubles in value as long as you pay the premiums.  Your child can subsequently increase coverage by a factor of 10 at the then applicable rate under the plan when they become an adult.

This time I looked at the $35K policy, which for a boy under the age of one has a monthly premium of $21.05. Hmm, sometimes it pays to be a girl...the cost of a girl's policy is $17.52, nearly 17% less than the boys' policy.

Let's stick with the boy's premium. They say that after 25 years (this was 20 years in 2008) the "cash value" of the policy equals or exceeds the premiums you paid.  So for a 2 week old baby boy that would mean you'll have paid in $6,315 by the time junior is 25 years old in the year 2038.

There's a 1 in 5,555 chance that your child will die between the ages of 1 and 14 in the United States, based on recent statistics (1 in 6,666 chance in California). Inversely, there's a 5,554 in 5,555 chance your kid will NOT die by the age of 14. Those stats change to 1 in 1,900 for teens ages 15 to 19 (1 in 2,127 in California). But this policy can only be initiated up until age 14.

One could infer from the above that there's a pretty slim chance that, thankfully, the policy won't be necessary through the age of 25, when you will have $6,315 of cash value. So how about if you took that $21.05 per month and invested in, say, the California ScholarShare 529 College Savings Plan, where you can invest on a tax-free basis for your child's higher education.

There are a number of investment options in the ScholarShare Plan (as well as plenty of other plans available in other states to consider). The most conservative, low risk, fixed income investment alternative in ScholarShare currently generates a return of 1.5%. Investing the $21.05/month at a 1.5% rate of return over 25 years would result in a balance of $7,656, over 20% greater than the cash value of the life insurance plan. A 5% investment return would generate a balance of over $12,500 in 25 years, nearly double the cash value in 2038.

Thus, I continue to believe that saving for your child's education is a much better financial decision than investing those funds in a life insurance policy.

The only scenarios where you might consider a life insurance policy for kids is where you believe there is a high risk that the policy will be needed, or if you want to guarantee your child's prospects of having a policy in place as an adult.

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Update May 2014: The May 2014 Money magazine has an article that confirms the points above: "The only reason to buy is to guarantee insurability later in life...and the size of most kiddie policies is usually too small to be useful for adults. A better idea is to save for a more likely need: higher education."