Should you buy insurance for your child?

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Should you buy insurance for your child?

Published by sam - 18/10/07 - 12:10:57 am

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Question: My wife and I just welcomed our first baby - and from the hospital all the way to our home, we kept getting propositioned on getting an insurance policy for our son. I have to admit it looks attractive because the premium is small. Is this a good idea? Or should I be increasing my insurance coverage instead? - Livius S.

Answer: Life insurance was designed to provide protection from financial burden when the head of the family passes away. It is said to have started in ancient Rome, when people formed burial clubs to help meet the funeral expenses of members and help the family with other payments to be made. The concept has been refined over the years into life insurance as we know it today.

Still, it is primarily for the benefit of those left behind, that they will be able to meet expenses. Children do not need life insurance. You are not dependent on your child for your income. If your child passes away, you can still continue to work and earn, and life will still go on for you.

Premiums are really low since children are young, and the risk of them passing away soon is not high. But parents don’t really need to take out life insurance in the name of their children.

What is needed is for you to be adequately insured. You are the breadwinner and the head of the family. You should make sure that your family will be able to stand on their feet in the event of your untimely death. You wouldn’t want them scrambling for funds and incurring debt to pay bills (including funeral and medical bills), put the kids to school, and sustain their lifestyle.

Even non-breadwinners need to be insured. Your wife, for instance, should also be insured so that if something happens to her, your family will not bear a heavy financial burden.

Just how much life insurance do you need? Experts vary in opinion in this matter. A good rule to follow is to have enough to sustain your family’s lifestyle for two years. This will give them enough time to make arrangements and establish their financial footing. Another way to compute how much life insurance you have is to add up all the costs you think they will meet in the future: funeral costs, medical bills, estate taxes, children’s education, debt payments, and retirement. In the US, some insurance companies recommend a face amount that’s worth seven times one’s annual income.

Life insurance premiums become more expensive as you grow older. This is why it is important to get a policy when you’re still young, such as now that you’ve just started a family.

There are generally two kinds of life insurance: term and whole life. If budget is tight now, you might want to get term insurance. It offers lower premiums yet still gives you coverage. There is also a set time period when you are covered (say, 10 or 20 years), thus its name. If you pass away within that period, your family will receive a payout. In case you survive the set term, there will be no payout at all as the insurance has lapsed already. If a term insurance fits your needs now, consider the length of time it will take for your children to be financially independent. Then make that length of time the term of your insurance.

Whole life insurance covers you for your entire life, up to age 99 or 100. This is good too since you will still be covered in old age; there is no 10- or 20-year expiry like in term life insurance. Premiums may be a little higher, though.

Many new life insurance products have come out in the market. Some offer you an option to choose where your premiums will be invested. This will potentially give you a higher rate of dividends. Others are marketed to a specific gender, such as women, and the benefits thereof (such as coverage for female illnesses) are worth getting the policy.

Every insurance policy sets limits on the illnesses it will cover. When comparing policies offered to you, read the fine print to see which preexisting illnesses won’t be covered. Ask around for feedback on the companies that have given you proposals. Go for an established company. Or you can consult brokers that represent several insurance companies to get wider choices.

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October 18, 2007 | Personal Finance |

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