Life Insurance

Juvenile Life Insurance: Should It Even Exist?

After high-profile deaths, Maryland became one of three states to increase restrictions on child life insurance. But is the product worthwhile in the first place?

Prince McLeod Rams was only 15 months old when he was killed by his father. Joaquin Rams had obtained more than $500,000 of insurance on the life of his son in a premeditated plot to make a profit off of the child's death.

Though uncommon, this tragic scheme has been carried out several times before, prompting some to call for stricter regulations on how juvenile life insurance is sold.

So far, not many states have taken action. Most states enforce "insurable interest" laws, which draw rough lines around who you're allowed to insure—and the maximum limits of those policies—but these laws do little to address the misuse of juvenile life insurance. However, last month, Maryland joined New York and Washington as one of the few states enforcing stricter guidelines upon life insurance companies.

While these three states' laws can't guarantee against similar crimes in the future, they do seek to increase the due diligence expected from insurance companies when writing policies on children, and they limit the total amount of insurance a person can take out on a minor.

Of course, the vast majority of parents who take out insurance policies on the lives of their children do so with no ill intent. However, the product as a whole seems incongruent with the fundamental purpose of life insurance—financial indemnification. A breadwinner purchases a policy so that, in the event of their death, their family will still be able to pay the bills. As tragic as the death of a child is, the child's family wouldn't typically lose a stream of income in the fallout.

We wanted to understand the thought processes behind the people who purchase insurance on the lives of their children, so we dug deeper into how the product is marketed. We spoke with Tony Steuer, a chartered life underwriter and advocate for insurance consumer rights, to gain his perspective on juvenile life insurance products.

Marketing message No. 1: Juvenile life insurance protects future insurability

The most popular rationale used to sell juvenile life insurance is that once you've taken out a policy on a child, they're entitled to that policy regardless of what ailments they might develop in the future. Your child could be perfectly healthy at age 3, but if they did develop health issues as an adult and didn't already carry a policy, they'd struggle to find affordable coverage.

Indeed, you can read many testimonies from parents and children who have found themselves in this exact situation. However, these cases are in the minority, and parents have no way to know whether their child will have any difficulty obtaining insurance in the future. Additionally, in such instances, the policy the child inherits rarely provides a meaningful amount when compared to what they ought to carry as an adult—and they don't typically have the option to increase this coverage.

Steuer gave the example of a child who grows up to earn a $50,000 salary. If that person wanted enough life insurance to replace seven to 15 times their annual income—a common benchmark recommended by some financial planners—they'd need around $500,000 of coverage.

"That is a crazy amount to have on a child, which most insurance companies wouldn't write on the life of a child anyway," said Steuer. On the other hand, a minimal amount of coverage wouldn't provide much support three or four decades later. "If you got a $25,000 policy, then the child would always have enough to cover their burial costs, but it's arguably not enough to move the needle in one direction or the other."

Marketing message No. 2: Juvenile life insurance acts as an investment vehicle

Juvenile life insurance advocates also contend that the product acts as an investment vehicle, which accrues a cash value that can be passed to the child when they reach adulthood. Some go so far as to claim the policy can be used as a tool to teach the child about saving and investing.

This is due to the fact that most juvenile life insurance policies are whole life policies, which do include an investment component. However, as Steuer pointed out, whole life policies are also the most expensive type you can get, and they don't tend to perform as well as other investment options.

For example, if you have a $25,000 policy on your child, for which you pay $200 a year, you won't build up a meaningful amount of cash over 18 years, once policy premiums are taken out.

"Whole life policies are not really a good investment, even though there are many books that claim that they are," Steuer said. "If you look at the actual internal rate of return on a whole life policy, you'll find that it doesn't yield that much, there can be restrictions on the access to the cash value, and it's not going to provide enough coverage for (the child) to address real financial needs."

Instead, Steuer recommends investing money in a cheaper, less opaque product, so your child can watch it grow and eventually cash it in for a major expense, such as college tuition. Your money will likely grow faster that way, and if the unimaginable happens, you can still tap into that fund for funeral expenses.

Marketing message No. 3: Juvenile life insurance covers burial costs and time away from work

As mentioned above, a juvenile life insurance policy could provide funds for a child's burial expenses. However, there are cheaper methods to cover this cost, such as a fund you've set up to cover the child's education costs.

But if you're truly worried about your child dying, and you don't have any other way to pay for funeral and burial expenses, an insurance policy might be a reasonable way to cover that cost. However, a juvenile life insurance policy still isn't the best way to do that.

"Term life insurance is usually the best product for everybody," Steuer said. "It's usually death-benefit only, but that's what insurance is about—it's about covering a risk." And if you, as a parent, purchase a term life insurance policy, you can typically add a death-benefit rider for your child for a very small amount. This benefit wouldn't transfer to your child, but it would cover burial expenses if your child were to pass away. And since it's far less expensive than most whole life insurance policies, it would free up funds to allocate toward other financial goals.

The emotional factors that play into the potential death of a child are significant. Steuer, a father himself, wouldn't want to minimize those feelings—nor would any other critic of juvenile life insurance. However, there are simply more efficient ways to protect your family from such a loss, while simultaneously accruing funds to pass to your child later on in life.

Daniel Caughill

Daniel is a Staff Writer at ValuePenguin, covering insurance, retirement and other personal finance topics. He previously wrote about compliance and best practices for K-12 school districts at Frontline Education.