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Child Life Insurance Argument

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  • Child Life Insurance Argument

    Hey all,

    Since reading the WCI post about why we should not have a life insurance policy on our children, I thought I'd have a chat with my advisor about why I currently own a $75,000 whole life insurance policy on my two year old son. Now I am on the lower end of financial literacy at this time, and was unable to really rebut any of his arguments, so I thought I'd write them down here and see if I can get some smarter heads to let me know what they think about his answers. I basically gave him all the reasons from the WCI post as to why these policies are not good, and he answered my questions. Please help me call BS on some of these, or let me know if they actually hold up. Thanks for the help!

    Background on Myself:

    - 6 months out of residency Family Practice physician.

    - Currently salaried physician at $175,000/yr

    - Maxing out my 403(b), with 5% employee match (4% base and 1% match)

    - Maxing out my personal Roth IRA and my wife's Roth IRA

    - 529 plan for my son's college fund (approximately 6K/yr) and $75,000 whole life insurance policy (for "non-education growth/spending")

    Arguments Against Child LI and Advisors Rebuttals:

    1) No earned income to replace: He agreed with this statement.

    2) Burying your child is not expensive: He agreed with this in theory, but stated that when something like that happens the parents most of the time take months off to grieve. This is where the policy would come in handy. I stated that we would have an Emergency Fund for that, and he agreed, but still stated that the $75,000 would be nice to have.

    3) Doesn't preserve insurability: This is where he stated how "different" and "special" our policy was. Again, not sure I believe it but it would be nice. He stated that our policy has a purchase benefit for my son that starts at age 22. At age 22 and every 3 years after that he can add 150K to the policy. This would mean that 7 such intervals (ages 22-43) he would add 150K every 3 years and get up to a 1.125M insurance policy if he wants. The kicker is that he would be able to do this with no proof of health. He would always get the rate based on his age and the status of "healthy adult", no matter the medical problems he may or may not have.

    4) Returns are Terrible: Again this is another area that he said differed greatly from the general "whole life insurance policy". He actually stated that this insurance policy has a guaranteed rate of return of 5%, rather than the crappy 2% that was posted as the average previously. He stated that if my son were to take this policy, do nothing but pay the monthly charge for it, that by age 65 he will have contributed a total of 33K to the policy, and it will be worth 165K in cash value, and have a 300K insurance attached to it. And all of it non-taxable.

    5) I also asked about the other options on where to put the money instead of the LI policy. Obviously, we cannot give my son a Roth IRA at this time, as a two year old does not have any earned income. We are already doing a 529 account for him. And the reason my advisor stated that most of his investors do not like the UGMA is because they don't like giving up control of the money when the kid comes of age. They don't like that all of the money goes directly to the child when he turns 18/21, whether he is a mature adult or still an immature kid who goes and buys a new car, etc.

    Anyway, let me know what you guys think. I would really appreciate some feedback. Thanks so much.

    Stephen T.

  • #2
    Wait, did that same FA sell you this? Again, run...


    • #3
      3- At least your policy preserves a decent amount of future insurability. It's got that going for it.

      1 and 2 are obviously crap.

      4- Your agent probably doesn't know how to calculate the returns. If you email me an inforce illustration I'll help you calculate the guaranteed and projected return. A 5% dividend rate IS NOT a 5% return

      5- I use 529s, UGMAs, and Roth IRAs for my children. I don't buy whole life insurance on them primarily because I want this money I'm saving for them to have a higher return. If your primary goal is to retain control of the money, then favor 529s and a life insurance policy you own and are the beneficiary of.  Or heck, just keep it in your investment account.

      Do you have student loans? I bet paying those off would be a much better use of your money.

      And again, don't mistake a commissioned salesman for a financial advisor. If you need life insurance, then buy life insurance. But don't ask a life insurance salesman if you need life insurance.
      Helping those who wear the white coat get a fair shake on Wall Street since 2011


      • #4
        Thank you again for the prompt response. I am definitely starting to see the picture more clearly, the problem will now be how to stop this and make sure I don't lose what I've previously saved while moving on to another advisor or just do it myself.

        And yes I do have significant student loans. I am currently sitting at about 300K, but am currently 3.5 years into PSLF, so at least there's a plan for that.


        • #5
          Now I'm mad. He sold you life insurance policies for your kids while you owe $300K? I mean, even if you are going for PSLF that seems like financial malpractice to me. He's probably not conniving, just miseducated. Lots of that out there among insurance agents masquerading as advisors.
          Helping those who wear the white coat get a fair shake on Wall Street since 2011


          • #6
            True enough. I read your blog post about breaking up with your advisor. I will be working on it. Seems a bit complicated with the transfer of all of the accounts, but I previous blog post talked about a Vanguard Personal Advisor Service that seems promising to me to help me transfer my accounts and to help me in the first year and I can stop the service after that. Does that sound reasonable?