Life insurance for kids?

If you want to start an argument, ask a group of financial advisers what they think about buying life insurance for children.

To some, it's a great, low-cost way to set money aside for the future and to make sure he'll have insurance as an adult, in case an illness later in life makes him uninsurable. Others say it's an outdated product that has been replaced by more effective savings tools, such as 529 plans. Still others say that since the purpose of insurance is to replace a wage-earner's income, it's inherently wrong to sell insurance on someone who doesn't have a job.

According to research from the American Council of Life Insurers, life insurance for children isn't a popular purchase. They report that only about 15 percent of people under the age of 18 have life insurance, a percentage that has stayed steady for more than a decade. The average amount of coverage on children is small, usually in the range of $5,000. Many companies will tack on a small amount of insurance to a parent's policy, essentially to cover burial costs.

should buy life insurance for kid?

Still, it's a commonly asked question and many parents aren't sure what to do, if anything.

"Most folks are torn," says Victor Gainor, second vice president of individual insurance products for TIAA-CREF, a life insurance company for teachers and their families.

He bought modest whole-life insurance policies for both of his children, along with opening 529 plans and setting up mutual funds. He did it primarily, he says, as a way to make sure that they'll always have some insurance and to have some cash available if his family gets in a jam.

"I didn't buy it to make money; I bought it to give to them while I have my other bases covered," he says. "I can also access the cash values that are accruing and use it for tuition or whatever I need to do for my family."

There's even disagreement about the kind of insurance that should available for children. TIAA-CREF won't sell term insurance on children, saying it "flies in the face" of the mission of the organization because it doesn't provide the policyholder with a way to accrue cash value.

Sestina sees other investments, such as Roth IRAs, as making more sense for building wealth for kids.

The future insurability issue

The only reason he can see for buying life insurance for children is if there's a family history of health problems, such as diabetes or heart disease, that might make it tough for them to get insurance when they're in their prime income-earning years.

"If your child has the potential for health problems, you'll have to buy a ton -- at least a million dollars," he says.

Since it's impossible to determine how much a child will make in the future, Sestina recommends using your own income as a guideline. The cheapest deal, he says, is on a 20-year policy. Try to get one that is renewable and has the option of converting to whole life insurance.

Since many insurance companies don't sell high-quality term insurance for children, Sestina recommends having an independent agent find a good policy for you.

Dave Christopher is vice president of risk product management for Thrivent Financial for Lutherans, a fraternal benefits society that uses life insurance and other investments to support the Lutheran denomination.

Many of his members buy cash-value policies for their children because of the insurability issue. A $10,000 policy bought for a child can be increased to $280,000 worth of coverage as an adult without medical testing.

Thrivent also markets the policies as a way to invest money on a tax-deferred basis. Since it's the gains on the investment that are taxed, the first withdrawals are from the premiums, which are tax-free.

"If you've accessed all the premium, you can take out loans against the gains on a tax-free basis as well," he says