Personal finance guru Dave Ramsey is a big proponent of term life insurance. He recommends that people buy sufficient coverage to equal 10 to 12 times their annual income. However, there is one group of people who he does not believe should be covered by a life insurance policy: children.
Many insurers market life insurance for children as a method of saving for their education or to ensure they can get coverage later. However, Ramsey believes that most of these reasons are mere marketing hype and that it is “absolutely not” worth buying coverage for kids because there’s “no financial advantage” to doing so.
Here’s why Ramsey doesn’t think life insurance for kids is worth buying.
No one is relying on a child’s income
Ramsey points out on his blog that the main reason people buy insurance coverage is to protect the people who are depending on their income. However, most children do not have income — and even if they do, parents don’t typically rely on their child’s income to cover the bills.
Since no one would miss a child’s income if the child passed, it doesn’t make sense to pay for life insurance for them. That’s why Ramsey believes insurers use other techniques to try to sell life insurance — most of which rely on common myths or play on parents’ heartstrings.
Life insurance isn’t a good way to save for a child’s education
Ramsey has explained that many insurers market life insurance for children as a way to pay for their child’s education. However, he suggests there are other, better methods of saving for college. Life insurance tends to provide lower returns than most other investments. And insurers charge high fees for policies and access the funds to pay tuition.
As a result, the idea that this is a good product to save for future schooling is nothing more than a myth and not a reason to buy insurance coverage at all.
Life insurance for children won’t necessarily help them get good coverage later
Another common reason people buy life insurance for kids is that they believe it will make it easier for their children to get protection later. Ramsey also dispels this myth, indicating that often the coverage limits on policies sold to children are too low to provide much protection. Kids can’t usually add much to them either once they reach adulthood.
Further, Ramsey says it’s not necessary to buy a whole life policy when kids are young for them to be able to get insurance later. Term life insurance is widely available and more affordable than a whole life policy for most people who buy coverage in their 20s and 30s.
Life insurance may not be the best way to prepare for funeral costs
Finally, many life insurance policies for children are marketed with the promise they’ll help parents cover funeral costs, which are indeed expensive. But Ramsey points out the likelihood of this becoming necessary is very low and suggests that parents simply put money into a savings account rather than paying life insurance premiums. That way, the money would be available to cover burial expenses if the worst happens, but could be used for other purposes if disaster doesn’t strike.
Is Dave Ramsey right?
Dave Ramsey’s reasons for not buying child life insurance are sound ones, and the vast majority of parents should avoid these financial products as they are an unnecessary cost with no real benefits.
Parents should, however, make sure they have sufficient term life insurance coverage in their own lives to protect their children and ensure they are provided for in the event of a parent’s untimely passing.
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