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 firstname.lastname@example.org 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.