By Bryan Tucker posted February 8 2019
Let’s get one thing straight. No child needs life insurance.
However, there are some very good reasons why making the tactical decision to buy life insurance for the kids is a smart move that can secure their life insurance needs for life.
When can’t you buy life insurance on children under 10?
Thanks to people like Winton woman Minnie Dean, New Zealand law doesn’t allow for a child under the age of 10 to be covered with a life insurance policy. The risk of harm to a vulnerable child is too great if an unscrupulous parent or carer could receive a large financial windfall on the death of a child in their care.
For children under 10 this leaves trauma cover, which pays a lump sum if the child suffers a major health crisis but nothing on the child’s death.
Why buy level life insurance on teenagers?
Level life insurance is an option available from most insurers. It allows a person to put in place a policy with a premium that never changes, or might change a little each year as the cover is increased for inflation. The term of the level premium could be a few years or for life.
Here are 5 reasons why getting level life insurance while young is a genius idea:
1. While they don’t need the cover now, they will likely have a need in later life as they move into adulthood. Getting the cover early means that there are less likely to be health issues that make applying for cover more difficult.
2. Having a life insurance policy in place when your teenager heads away for the big OE will be one less worry. Getting the cover while they are overseas is difficult. Life insurance, once in place, covers them worldwide.
3. Changes in their circumstances, like starting smoking or taking up a risky profession won’t affect them as they will already have cover.
4. Choosing a level premium option means that cover that can be held for life will always be charged a flat premium that never changes. Imagine being 85 years old with a large inflation adjusted insurance policy costing the premiums of a 16-year-old.
5. Even though life insurance normally has no cash value if it is cancelled by the policyowner a level life policy would become an asset that could be traded for cash in later life. What would you pay a 90-year-old if they agreed to make you the recipient of their $1,900,000 life policy costing $70 per month to keep in place?
New Zealand Insurers won’t usually consider an application for life cover on a child under age 16.
What I did for my teenage children
When my kids reached aged 16 I put in place a level premium life policy for $500,000 with an automatic annual increase to the cover of 2.5% compounding. The premium at that young age worked out at $70 per month and the 2.5% increase applied right through to age 70. After that the cover remains level for life and pays out on death.
My children are now adults and have since taken over payments for their policies. In their late 20’s they have nearly $700,000 of cover with a premium that is still $70 per month. When they reach age 70 they will have $1.9 million of life cover, still costing $70 per month. The total premiums paid between age 16 and 70 are just $45,360.
They could very likely go through life without the need to buy any more life insurance.
This may not be an option for everyone but if you can afford it you will make a massive difference to your child’s financial future.