They are precious, aren’t they? But unlike the new house you build with proceeds from your homeowner’s insurance, they are also irreplaceable.
So why do so many employer plans offer supplemental life insurance for your children? It might be a way for the insurance company to make a little more money, but I suspect the root of this particular employee benefit may go a little deeper. So I did a little digging (can you see I’m missing my garden work these days?)
Turns out, insuring children started way back in Roman times. Those clever Romans were in the habit of forming “burial clubs”, a way for low-income folks to pay for the burial of a loved one. To belong, you paid an annual fee to the club AND you made a contribution of wine each year. Hmmm…I guess if everyone in the club drinks enough of the wine, someone is bound to need burying….After awhile, society figured out it might be better to separate the wine-drinking from the burying and the concept of insurance was born.
In the U.S. life insurance began in earnest in the late 1700’s. Before the Civil War, many plantation owners took out life insurance policies on their slaves, including any children working those cotton fields. Like key-man policies today, the death of a slave would have meant a hit to the revenue stream.
But is insurance on your child necessary today?
Since most policies offered through employers have a maximum benefit of $10,000 per child, it’s clearly designed as that old Roman concept of covering the burial costs. As tragic as it would be to lose a child – for lower-income workers, funeral costs can be prohibitive and one could definitely argue that insuring for such financial risk is prudent.
As for the slave-owner concept of child insurance – well, as much as my own children complain about the chores around the house, they are not actually contributing any revenue to the household. Therefore, the typical reason for buying life insurance, i.e. as income replacement in the event of catastrophic loss, doesn’t really seem to apply.
The insurance companies who sell these policies make the argument that it is an inexpensive way to provide your child with life insurance for his or her adult years. This may be a persuasive argument under two conditions: 1. The policy you are being offered is a portable, permanent life insurance policy building cash value each year; and 2. The health of your child is going to be compromised as an adult. The first is easy to ascertain, although many employer plans are term only, with no cash value. The second is, in most cases, very difficult to know. Will your child have diabetes or breast cancer that would prevent them from getting a reasonably priced policy later? You could certainly look at your family history and make some guesses, but is a $10,000 term policy really going to help them down the road?
As irrational as it may sound, I suspect part of the reason 15% of employees purchase insurance policies on their children is to FEEL some protection against the possibility of losing a child. We all know the insurance won’t literally protect the child from harm but having it somehow makes us feel a little more secure. We know that the payout won’t ease our sorrow or compensate us in any way for what we have lost. In most cases, it won’t replace any income. And yet, by having it we somehow feel we have done our duty to provide the maximum protection we can to our families.
So, during this open enrollment season, when you are tempted to check that box that will take an extra few dollars out of your paycheck each week for child life insurance, consider why you are really doing it.
If you want to cover burial costs, it may make sense.
If your child is a prodigy already earning money, it may make sense.
If the policy offered is a portable, permanent policy with cash value build-up, it may make sense.
But if you are doing it because it’s cheap and you believe you are providing your family additional protection, reconsider. Put the money towards their college education instead.