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Why You Don't Need Whole Life Insurance for Your Infant

Posted August 8, 2012 by Hull Financial Planning to Family Finance 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

Gerber makes baby food. I grew up eating Gerber products. However, they also offer whole life insurance policies for infants. Buying life insurance for your child is not a wise decision; if you’re buying it for your child, then you are wasting your money.

First, let’s look at the rationale for buying life insurance. In general, the purpose of life insurance is twofold: either to replace lost income for an unexpected death or to facilitate wealth transfer for subsequent generations. The most common need for insurance for a child is for funeral and medical cost coverage. Funeral costs can vary widely depending on what is desired for the service and the coffin, but in general, they can average less than $5,000. Final medical costs will depend on insurance and what was the cause of death, so a reasonable estimate is $20,000. Therefore, final expenses for a child’s unexpected death would cost approximately $25,000.

Having a fully funded emergency fund should cover most, if not all of the final expenses. That is and should be the primary source of funding in the event that such a tragedy happens. However, let’s look a little further at what happens to your money if you get a whole life insurance policy for your child.

The cost of a $25,000 whole life policy for a boy under 1 year old in the state of Virginia is $14.03/month, or $168.36/year. This is for a policy good through age 14.

We also have statistical data about childhood life expectancy from the Social Security Administration. The highest risk period for a child up through age 14 is the year of birth is in the first year, and within the first year, the highest risk period is within the first month. Merging the data from the Social Security Administration and the NHS, we see that there are 7.38 deaths per thousand before age 1, but 6.87 of them are within the first month. It is no wonder that Gerber won’t insure babies before day 14. Assuming that there is a uniform distribution – meaning that the number of deaths for each day in the first month is the same, which is not necessarily an accurate assumption – we could assume that 3.44 deaths are in the uninsurable period of 0-14 days, so 3.95 deaths would be during the insurable period.

If you then take the percent probability that there will be a death multiplied by the insured amount, you get what is called an expected value for the period, meaning that in a very small amount of the time, you get $25,000 and for the remainder of the time, you get nothing. Averaging out the vast preponderance of times of receiving nothing with the few tragedies yields an expected value. Below is the expected value for each year of insured coverage:

Age EV
0  $98.63
1  $12.35
2  $  7.93
3  $  6.03
4  $  5.00
5  $  4.48
6  $  4.15
7  $  3.80
8  $  3.33
9  $  2.70
10  $  2.23
11  $  2.35
12  $  3.63
13  $  6.30
14  $10.03

The above shows that you’re paying $168.36/year for average benefits ranging from $2.23/year through $98.63 per year. Once your child reaches age 1, then the expected return on your investment is an average of -97%.

Insurance is meant to cover catastrophic events. While the loss of a child is, undoubtedly emotionally catastrophic, it is not financially catastrophic like the loss of an income earning spouse would be. If the final costs would create an extraordinary burden your family, then I could see getting the insurance for the first year of life, but then, unless there was a terminal illness which is likely to mean a short lifespan, I’d recommend dropping the insurance. The numbers show that this plan is an enormous moneymaker for the insurance provider, preying on the emotions of parents to generate vast profits. Plan intelligently and keep a healthy emergency fund and plow that $168.36/year into your child’s college fund.

About Hull Financial Planning: Jason Hull is the owner of Hull Financial Planning and is a candidate for CFP Board’s certification and passed the CFP(R) exam in March 2012. He is a Series 65 securities license holder.

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