Does Your Kid Need Juvenile Life Insurance?

You may need life insurance after getting married or having a child, but do you need it from the day you're born? Advocates of juvenile life insurance say "yes" and hail the policies as financial planning essentials, while critics argue they're a waste of money.

Just like grown-up life insurance, two types of policies are available for kids: juvenile term insurance, which provides coverage until age 23 or 25 and offers the family a death benefit to cover unexpected funeral expenses for the child; and juvenile permanent insurance, which includes both a death benefit and a savings reserve that builds "cash value" as the child ages. Here's what a family needs to know.

Child death benefit pros and cons
Companies offering juvenile term life insurance talk about how the policies can provide a family with "peace of mind" by offering financial assistance -- namely, a death benefit -- "if the worst were to happen" to the child.

Juvenile term policies are sold on the idea that the death benefit is not designed to replace income, as it would be for an adult, but instead is geared toward covering burial and funeral costs if a child passes away.

Pros: Funerals are expensive. According to the most recent survey by the National Funeral Directors Association, the average cost is about $4,300, and that doesn't even include casket and cemetery expenses.

Cons: Chances are remote that a parent would ever need to pay for a child's funeral. The U.S. Department of Health and Human Services estimates that only 0.03% of U.S. children die between the ages of 1 and 4. And then, for children ages 5 through 14, that mortality rate drops by about half.

Since the death of a child is so unlikely, purchasing juvenile life insurance strictly to cover potential funeral costs is "very short-term thinking," says J. Robert Hunter, director of insurance for the Consumer Federation of America, a nonprofit consumer advocacy group based in Washington, D.C.
If families are concerned about covering unexpected funeral costs, Hunter says, they'd be better off creating a college savings fund and pulling from that if needed, rather than purchasing a juvenile life insurance policy.

Savings component pros and cons
The real advantage of a juvenile life policy is for saving, says Jack Dolan, spokesman for the American Council of Life Insurers, a Washington, D.C.-based trade group.

"What we see more clearly year after year is that the savings in a cash-value life insurance policy provide a good, solid return. And, particularly when you're in a low-interest-rate environment, it becomes an attractive means of saving," he says.

Pros: Dolan points out that the insurance plans offer tax-deferred growth, and many come with guaranteed returns, meaning your money will increase regardless of what happens in the financial markets as long as you keep making premium payments.

Unlike money kept in other savings vehicles for children, such as 529 college savings plans and Coverdell Education Savings Accounts, a juvenile life insurance policy's cash value doesn't have to be used solely for education but can be used by a grown child for other purposes, such as wedding expenses or to launch a business.

An added bonus is that children who have permanent, cash-value life insurance won't have to worry about qualifying for a policy as an adult, adds James Garfinkel, the founder and CEO of New York-based New Amsterdam Life and a director of the nonprofit Juvenile Life Insurance Foundation.

"(Juvenile insurance) guarantees the future insurability of the child, regardless of their future health, lifestyle or residence," Garfinkel says. "It's issued without any physical exam whatsoever."

Cons: Cash-value life insurance comes with fees, service charges and commissions that can prevent a policy from generating any actual returns for at least a decade, acknowledges Garfinkel. He says the rewards come over the long haul.

Hunter says the fee structure of juvenile policies makes it difficult to understand what a child's policy is really worth.

"It's much better to put money in some kind of an investment account to build to college years," he says. "It's much more understandable. It's much more transparent."

If putting money aside for college is indeed the goal, 529 prepaid tuition and college savings plans can generate returns more quickly than juvenile life insurance, and some of those plans offer state tax incentives or matching grant money that isn't available with the insurance policies.