The Pros and Cons of Life Insurance for Infants

Is infant life insurance a boon, or a boondoggle? On the pro side are companies like Gerber Life and Globe Life Insurance that promote infant life insurance as a way of providing financial security to families and, eventually, to the insured children once they have grown. Critics complain that the investment benefits of infant life insurance are overstated. They suggest taking the money that would go into a life insurance policy and investing in something else. Who is right?

Actually, they both are. The question is: Which competing strategy fits a family’s financial goals and, just as importantly, its investment aptitude?

The product at issue is whole life insurance. In addition to insuring the life of the child, a whole life policy builds cash value over time. Cash value is the amount the insurance company will surrender to the insured if the policy is cancelled. The accumulation of cash value is slow but steady.

Critics suggest that the money spent on whole life insurance would be better used investing in something else. They suggest using part of the whole life premiums to pay for a term life insurance policy with the same amount of coverage. That way, the life is still insured. Because term life covers a set number of years and does not build cash value, the premiums are much lower than they are for whole life. According to this strategy, the money saved on premiums should be invested in the stock market, Treasury bills, bonds, or an Individual Retirement Account (IRA). Over time, the critics say, the return on any of these investments will exceed the return from a whole life policy.

Individual investing has its own drawbacks, however. First and foremost, the plan is difficult to start, both logistically and emotionally. It requires at least twice as much paperwork to get started-one set of papers to initiate the term life insurance and another to set up whatever the investment is. The alternate investment requires a great deal thought and research, as well. Which stocks? Which mutual fund? Which bonds?

The emotional factor cannot be ignored, either. The beauty of whole life insurance is that the investment feature diverts attention from the life insurance feature. Parents of a newborn do not want to think about their child dying. With whole life insurance, the focus is on life-building a financial future-not death. Putting term life insurance into the mix strips away the emotional cushion. Parents are forced to confront the possibility of losing their child. Many people refuse to do so, and they end up doing nothing.

This is the problem with individual investing in general; inertia is difficult to overcome. Everyone should be saving and investing all the time, but they don’t-unless it is so easy to do so that they cannot resist. This is another appeal of whole life insurance. It offers an easy way for parents to invest some money in their child’s future.

Those who have the emotional detachment to take out term life insurance on an infant and the financial aptitude to select their own investments should avoid whole life insurance. But those who are turned off by the thought of insuring the life of their newborn and who lack the financial savvy to invest on their own should consider it. Whole life insurance is better than no investment at all, which is what many people would have without it.