During a discussion with some parents who attended my talks, one mother told me that she purchased a life insurance for her only child and that she has been paying for its premiums for more than 5 years already. This assured her of a “better” financial security for her daughter.
Unfortunately, after consulting some unbiased financial planners and doing my own research about life insurance (or VUL) for children, I’ve concluded some important points that parents like me should consider with extra care before making decisions in choosing the right financial instruments for their children’s future.
My personal answer to the question (and the title of this article) is… definitely NO.
The purpose of buying a life insurance is basically to help sustain the financial condition of a family member (a wife/husband and/or children) when a breadwinner dies. The cash proceeds can be used by the bereaved family and children to pay for their living expenses and other important bills such as tuition fees that should last for a few years until a spouse of the “breadwinner-heir-to-the-throne” finds a job.
Another purpose and use of life insurance, in the case of Filipinos, is that the proceeds can be used to pay for “transfer taxes” so that the lawful heirs or family members can enjoy the estates or mana left by their departed loved provider.
On the other hand, a child is never a breadwinner and should never be. In fact, if a very sad event happens like when a sick child dies, the daily living expenses of the family will eventually be reduced. Therefore, with this example, a life insurance for a child is never the best decision to make.
The Importance of Emergency Funds and Investing for Education
Instead of buying a life insurance for children, parents should do their best to build up and maintain an emergency fund to cover for medical expenses and although it’s difficult to say, funeral expenses. Without an emergency fund, parents will definitely be suffering from debts and anxiety if that sad event happens.
Other parents who also want to avail life insurance for their kids were most likely tempted by the “college education” component of the policy.
In my opinion, a feature like this is actually meant to attract parents who don’t have any idea about investing in stocks or pooled funds like mutual funds and UITF’s where money can work harder with stronger returns and performance. If started at the right time, investing directly in these instruments will be enough to cover a child’s college tuition fees.
However, some “well off” parents will say that “Hey, we got the cash to pay for a life insurance!”
If availing a life insurance product for your children is what your heart is beating for, then go for it. But then the word that I always love to say: Prioritize.
Focus on the things that your kids need now such as healthy and nutritious food, clean environment, regular medical checks, and an awareness on the importance of wise spending and saving for the future.
And if you really are decided to get an insurance for your child, always compare the products from at least five providers and don’t rush. Look at the premiums and the coverage. It should just be enough to cover your child’s funeral expenses. It should also be heavily focused on the living benefit component such as the critical illness benefit.
Thinking about your young child’s college education? Again, learn how to invest directly in stocks or pooled funds via mutual funds or UITF’s for this purpose.
Join the OFW UsapangPiso Facebook Group to learn how to plan your finances the right way and how to grow your money in various financial instruments and investment vehicles such as stocks, mutual funds, UITF’s, bonds, money market, real estate, and others.
P.S. 1. Bro. Bo Sanchez has appointed me as a coach for our young and new investors at the TrulyRichClub social site. It’s a fun, learning family with the purpose of “helping good people become rich”. I’m inviting you to join the TrulyRichClub too and email me at admin@burngutierrez.com if you have any questions. Click here to join!
P.S. 2. OFW UsapangPiso Saudi Arabia will hold its 2nd Family Finance & Investing Forum on April 11, 2014 in Ras Tanura, Eastern Province. Although it’s going to be limited to a number of participants, we will be webcasting the event live through our Ustream channel. Keep posted for details.
Tama!!!
I totally agree, Burn. I read the same topic on rappler, form an RFP no less. I was very disappointed to see an RFP advocate life insurance for a child. And the main rationale amounted to nothing more than “having financial freedom while grieving”. sad.
It’s nice to read an honest and level-headed take on this.
Hi Carlo. I believe that the RFP you are referring to is me. Whatever I wrote in that article was based on the experiences I obtained in my eight years of being in the insurance industry. And they are all my opinion (just like whether or not VUL is the best or worst insurance product in existence or should we buy term and invest the difference or invest in a VUL instead).
I have to correct you though for you may have fail to grasp the entirety of the message of my article because nowhere did I wrote, explicitly or otherwise, that I was promoting financial freedom through the demise of a child. I merely say that the proceeds was a means to tide the parent over during a time of grieving and NOT TO ENRICH ONESELF (now that’s explicitly written).
Again, to each his own. Insurance planning, just like any facet of financial planning, must meet the needs of the clients. It just so happen that what I wrote there met my clients’ needs.
This is one of the reasons why I think Sun Life only offer the minimum face amount for a child when the parents are not yet insured. But of course the company cannot totally deny an insurance application of a child just because of the reason that it is not “recommended.” The proper way should be the parents get enough life insurance coverage and invest in mutual funds/UITFs for the child’s education. Also get HMO for the child for hospitalization. The RFP that wrote the article in Rappler is connected to Sun Life but of course I totally don’t disagree on the points he pointed out in his article. If I myself has money to insure my kids, I would get something that has coverage for dreaded diseases like cancer, et. al.
I beg to disagree. Thing is, Insurance has now evolved. Companies have come up with different products catering not just to the insurance needs of the person but the other aspects as well such as investments and health benefits. So much negativity has been said about VULs, but the only way to really know about it is really study an actual product sold to a person who had decided that that product is really what he/she needs. Everything boils down to the NEEDS of a particular individual. It can NEVER be generalized. Just like MFs and UITFs and MLMs, etc. An experience of one cannot be the gauge for the others because each of us has DIFFERENT needs. I, myself have 7 accounts with COL (direct stock investment) and 9 accounts with Sunlife including VULs and MFs. Because I know and understand the benefits of these products and because I NEED them, I got them. My husband and I used to be so skeptic about insurances UNTIL we understood taht each product caters to different needs. And since our needs were addressed by these products, we know that we have to get them for our family.
The VULs I got for my kids (which has insurance and investment component) were perfect for their financial needs in the future. The purpose of getting them an insurance product was not really to insure them as we believe and we hope they’re not gonna die during their young years (that’s why I agree with @rfcmat who commented above and I quote “This is one of the reasons why I think Sun Life only offer the minimum face amount for a child when the parents are not yet insured. xxx”). Our purpose was to SAVE for them, since the products comes with an investment component, and to SAVE them from high cost of insurance when it’s time for them to get one in the future. The product I got for my kids is only payable in 5 years, and on the 6th year, their insurance cost would only be Php600/year! And this is effective until age 88! Where can an adult get an insurance for only Php600 a year? And since there is fund value in this product, my kids don’t even have to worry about paying this 600/yr coz it’s already absorbed by the huge amt of their fund values! And to make the product even more amazing is that their coverage, which start with only the minimum, also COMPOUNDS!
Again, this is me who know about direct stock investing and yet still find beauty and value in other products because they catered to MY needs. It all boils down to what do you really need. And make a very intelligent decision on the product you’re getting rather than rely on the remarks, comments and ideas of other people. ASK a lot of questions. DO thorough research. All these products are made with specific markets in mind.
@Joey, good thing you’re with Sun Life to save the day. And you understand how financial instruments work. This proves that not all insurance companies were created equal. 😀
I’m not totally against VUL’s because I had them as well (the type which i call “investment with insurance component”, not the other way around), because that’s where I started my investing journey years ago. In fairness to Sun Life and other companies, they now have so many product options and flexible terms to choose from.
But I still believe that VUL works for SOME people only.
Insurance is primarily for protection, with returns as secondary reason to buy it (but even the historical returns of VULs/whole life are really non-commendable). I won’t recommend it to the general public, much more for the children. I would still advocate investing in pooled funds and/or stocks to parents if their sole purpose is to save up for their children’s education.
VUL is a pooled fund as well. I’m not sure why you said historical returns of VUL are not commendable when it doesn’t differ much from MF and UITF, aside from the fact that being regulated by a stricter Insurance Commission than SEC and BSP, VUL is a bit more conservative (e.g. Forbidden to have shares of mining company on portfolio).
While historical returns are important in choosing an investment, it is not and should not be the sole basis. We must also consider it’s liquidity upon death. Insurance is the most liquid paper asset of all. This will save the child from the trouble of claiming his parents’ investments(which usually takes a long time even if estate tax is paid) if he is still a minor. The supposed ‘gains’ or advantage of investing in stocks or other pooled funds are useless when it goes to pay for estate taxes, probate expenses, and professional fees (e.g. Lawyer, accountant). In the end, being too greedy and too much in a hurry to grow our money will prove to be more costly.
The plans of the diligent lead surely to advantage, But everyone who is hasty comes surely to poverty. (Proverbs 21:5 NASB)
pa edit ung 800/yr to 600/yr. thx