People hold strong opinions on this topic so I wont delay in making my point. I firmly believe my children should be insured for the same reason my wife and I are insured – to protect income. You see, my wife would be emotionally unable to work for several years if my child died and I’d like to take a year off from work to spend time with the family. Our hearts would be torn to shreds and we’d need time to focus on each other. Everyone’s financial arrangement is different and I’m not suggesting all children should be insured, but I do believe this is overlooked by many.
Life insurance options for children are more limited than for adults. Term policies aren’t available so you can decide between whole life and universal life. There are several flavors of whole and universal available but I’ve chosen variable universal life (VUL) for each child. There are a lot of misnomers about universal life policies so allow me to explain how my policies operate.
Each of these policies have a $250K face amount. I currently pay between $780 and $840/year for each policy. It’s important to note that premium is not equivalent to cost. Over the first 20 years I’ll pay $16K in premium per policy, but contract charges are expected to amount to $6K. I’m contributing more in premium than contract charges amount to, which allows for cash value to accumulate. The cash value is then invested predominately in equities. My policies have variable death benefits, meaning the face amount and any cash value would be paid out. Most polices have a fixed death benefit that provide $250K as long as CV is under this amount.
Another way of assessing cost is calculating the opportunity cost of premiums being invested in a traditional investment account. Assuming the same net-investment rate of return the opportunity cost is about $10K over the first 20 years. Cash value in the life insurance policies is expected to grow to $22K in 20 years and within a traditional investment would grow to $32K. Opportunity cost amounts to more than $6K because a traditional investment doesn’t share the same fees as these life insurance policies. If you don’t consider the $500 average annual opportunity cost worthwhile, this probably isn’t the product for you. For now, I consider this worthwhile since it could make the difference between retiring my wife and going bankrupt. Mourning the loss of a child on top of financial stress seems like a bad combination. I’ll reconsider these policies if our financial situation ever changes enough that we have the financial means to retire within the next 20 years.
It’s also worth mentioning that I’ve opted to pay additional for a guaranteed increase option rider. This allows the face amount to increase by $100K on 10 different occasions, meaning the face value has the potential to increase to $1,250,000. It could allow them to protect their future spouse and children if they develop health issues later in life. This is definitely an emotional purchase. It pains me to see parents with health complications who’re unable to purchase the amount of insurance their family needs. I’ll encourage my children to apply for term policies as soon as they begin their careers. If they’re healthy and able to lock in term insurance I’ll drop this rider (and possibly the entire contract) but for the time being it’s costing me about $50/yr. on each policy.
To help wrap your head around fees, let’s dig deeper into costs – this is no simple matter. There are several different fees within these policies that add up to the previously mentioned amount. Some fees are fixed and some are variable. I’ve pulled the information on fees from my most recent purchase for my youngest child. As you’re reading through these you need to remember this is insurance and it provides a death benefit that traditional investments don’t. VUL insurance isn’t an efficient investment but traditional investments don’t provide a $250K benefit when you die.
| Type | How it’s Calculated | First 20 Year Cumulative Costs |
| Premium Charge | 5% of premiums | $780 |
| Basic Monthly Charge | $7.50 per month | $1,800 |
| Monthly Unit Charge | $0.01 per $1,000 of face amount | $600 |
| Mortality & Expense Charge | 0.70% – 1.10%/yr. of Cash Value | $546 |
| Cost of Insurance | $0.15 – $999.96 per $1,000 at risk | $1,317 |
| Optional Guaranteed Increase Rider Charge | $0.36 – $2.52 per $1,000 of rider amount | $975 |
If I wanted to increase premium the only change to fees would be the premium charge and mortality and expense charge. All other fees would remain fixed, so there’s an economy of scale to funding these with higher premiums. Long ago universal life policies were being highly leveraged by the wealthy because growth is tax deferred and death benefit was not taxed. The federal government decided to pull in the reins and limit how much premium can be made to these before policies lose some of their tax benefits.
My current objective with these policies is to provide peace of mind for $500/yr. This could turn out costing more though. Insurance companies have the option to increase fees if they deem necessary. I don’t like giving away control of my money when I can avoid it but it’s currently the best way of protecting my wife’s income. These policies will offer a few options in future years but I’ll likely either max fund them to make them as efficient as possible or cash them out and exchange them for term policies when my children are eligible to buy this coverage.
Variable universal life policies can be difficult to wrap your head around. It took me a couple of years to warm up to them and I completely understand people’s hesitation to these. Term policies are popular because they are simple and you know what you’re getting. Simplicity is important, and complexity isn’t always better. I’m a big proponent of term policies but term isn’t an option for infants and missing out on $10,000 over 20 years won’t break the bank, but being unable to work might.