Which of These is Not a Reason for Purchasing Life Insurance on the Life of a Minor? New
Estimated reading time: 4 minutes
When it comes to life insurance, most people associate it with the protection of dependents and the replacement of income. However, some policies are purchased on the lives of minors — children under the age of 18. This topic generates significant debate, with opinions varying between financial planners, insurance agents, and parents themselves. To truly understand which motivations are valid (and which are not), let’s explore the real reasons families buy life insurance for minors and identify which commonly cited purpose is NOT a genuine or appropriate reason.
Common Reasons for Purchasing Life Insurance on the Life of a Minor
1. Covering Final Expenses
Although difficult to think about, the death benefit from a child’s life insurance policy can help cover funeral and burial costs if the unthinkable occurs. This can ease the financial burden on grieving families during an emotionally turbulent time.
2. Securing Future Insurability
Children can develop health conditions that may make purchasing life insurance more difficult or expensive later. Buying a policy now can guarantee they have coverage as adults, regardless of their health in the future, thanks to features like guaranteed insurability riders.
3. Building Cash Value
Permanent life insurance for children (like whole life or universal life) accumulates cash value over time. This can be used in the future for major expenses such as college, starting a business, or even as collateral for loans.
4. Locking in Low Premiums for Life
When purchased at a young age, life insurance premiums are much lower and can remain fixed for life. This can be a cost-effective way to secure lifelong insurance coverage.
5. Gift or Legacy Planning
Some families view a child policy as a unique gift, offering a lifetime asset that the child can use in adulthood, or as an inter-generational financial tool.
Reasons That Are NOT Appropriate for Purchasing Life Insurance on a Minor
Now, let’s identify the motivations that do not make sense, are financially illogical, or are rooted in misconception.
1. Income Replacement if the Child Dies
One of the fundamental reasons for purchasing life insurance is to replace the income a person provides for their dependents. Minors generally do not earn an income or financially support their families. Therefore, purchasing life insurance on a minor with the intent of replacing lost income is not a valid or logical reason.
Why? Insurance only makes sense when a financial loss is suffered due to the death of the insured. As children are, by definition, dependents rather than providers, there is no income to replace.
2. Tax Savings as a Primary Motive
While there are incidental tax benefits for parents buying certain insurance-linked investment products, purchasing a child’s life insurance plan primarily to save on taxes is not an optimal or rational reason. There are other, more efficient investment vehicles dedicated to tax savings and wealth building.
3. High Returns on Investment
Some families hope to use child insurance plans for robust investment returns. However, returns from life insurance-based savings plans often lag behind inflation and underperform compared to options like mutual funds, PPF, or other instruments designed specifically for wealth generation. If high return on investment is your main goal, child life insurance isn’t the right choice.
4. Creating Financial Dependence
Insurance is designed to support those who are financially vulnerable if the insured passes away. If parents are not financially dependent on their child, this type of policy doesn’t serve that purpose.
5. Risk Management for Major Liabilities
Adults often buy life insurance to protect loved ones from liabilities such as mortgages, business debts, or education loans. Children, however, rarely have liabilities to pass on.
