Life Insurance for Children – Do they really need it?
Client: Hey! I just delivered and we would like to look at setting up hospitalization plan and creating education funds for my new born. Do you have anything to recommend?
Me: Congrats on your new born!! Of course, I can help you with that!
How about setting up life insurance for your little one?
Isn’t hospitalization plan good enough?
It is common for parents to set up hospitalization plans for their little ones. If you’ve been interacting with other parents, you would have heard of stories where children are hospitalized for different reasons such as high fever that doesn’t subside, bronchitis, stomach flu, rotavirus etc.
It is also common for parents to look into creating funds for their children. Some call it education fund whereas some call it a start-up fund that give their children a head start (as a gift to them) when they get married or buy a house.
It is however not so instinctive for parents to think of setting up a proper life insurance plan for their little ones.
Buying time to care for the kids
Most don’t see the need to plan because the kids are not earning an income and they’re not providing for us, just like how we (as working adults) are providing for our parents and family.
“I know I need insurance on myself because I’m the bread winner (to my parents and to my family) but I don’t need any pay-out from my children when something happens to them” is a common refrain I hear from clients when the topic of life insurance for their new-born is discussed.
However, what is not commonly understood is that the intention of having a life insurance plan with critical illness coverage on the child is definitely not to profit from the pay-out should a claim happen. Rather, it is to buy time for one or both parents, to have the option to become full time parent and to take care of the child in times of need, without the worry of loss of income towards the family. This is especially important when the child is still young, vulnerable and needed attention.
For example, when a child is unfortunately diagnosed with a serious and severe illness such as cancer, it is understandable that at least one of the parents will be the full time caregiver. With many families on dual income arrangement, there will be a potential for loss of income when one of the parent stops working. Having insurance on the child is one way to cover for this financial loss.
In my opinion, a good rule of thumb on the amount of coverage (on the child) is at least 2 years replacement of one or both parents’ annual income.
Locking up of health status
Planning early for the child also lock up their health status.
Below is an example of a child diagnosed with attention deficiency hyper activity (ADHD). This is an excerpt of the underwriting decision where the child applied for insurance coverage:
(Click the image above to enlarge)
This means the child is not accepted for disability and illness insurance coverage until he reaches the age of 18. This is a concern for the parents as they’re worried of major health issues before age 18. They’re also concerned about other health issues being diagnosed before child turns 18 that further prevent him from getting a proper coverage.
What is ADHD?
Children diagnosed with ADHD tend to have learning difficulties due to their inability to concentrate, absorb information and complete tasks or homework. A sign that your child may have ADHD is when he or she displays the following characteristics:
- Your child has a tendency to act before thinking of the consequences
- He often jumps from one activity to the next
- Displays a sense of disorganisation
- Has a tendency to interrupt a conversation or activity
- Your child is always active, restless or has problems sitting still.
- Holding your child’s attention is difficult or he has difficulty staying focused and completing a task.
Diagnosis and Treatment Options
Because only about 25-30% of individuals with ADHD eventually ‘outgrow’ the patterns, Therefore, it is important to address the condition early. While there is no ‘cure’ for ADHD, the available treatment options seek to help the child cope with and manage the condition effectively. These come in the form of drugs and behavioural therapy, or a combination of both in some instances.
This is a comment from a client of mine whose child has ADHD:
“ADHD is a condition that kids don’t recover from; it’s a condition that they grow out of. No doctor would ever write that a child recovers from ADHD because that would mean putting their profession on the line.” – Joyce
For the past 10 years, I have come across different health issues. One adult that I know (let’s call him Mr D), was diagnosed with diabetes as early as 11 years old. His parents did set up plans for him and they’re all savings plan that doesn’t cover him much when death, disability or illness strikes. It’s great that his parents help to set up savings plan while he’s young, just that this is a classic case of careless planning – by setting up savings plan first and neglecting the risk management portion.
Someone with Mr D’s health history is likely to have difficulty getting health insurance coverage as there could be a need to pay additional premiums, have exclusions imposed and in some extreme cases, have their insurance application rejected. This is despite Mr D needing insurance when he has a young family.
Setting it up at kid’s rate
Another benefit of starting early is, the premium is based on kid’s rate. It’s a great gift for the child because if the plan was set up since birth, for the same coverage as adults, the premium is much lower.
Life insurance used to have only one option of having premiums payable for life. With time, plans have enhanced and life insurance now have the option of 10-25 years of premium terms.
“I have to continue with the premiums of the life insurance plans that my parents set up once I started working. I don’t know what was set up and I have to contribute as long as I want to keep the plan.”
This is a typical statement by children who inherited plans that are payable for life. More often than not, they don’t appreciate the plans set up as it’s something they have to upkeep as long as they want to keep the plan.
However, if the plan has a limited premium term and it is fully funded before the child starts working, it’s one of the best gift that we, as parents can give. Even if there’s a few remaining years of premium before the plan is fully paid, it’s an easier plan for the child to take over versus a plan that is payable for life.
In addition, waiver of premiums can be added to a kid’s insurance plan, meaning if death, disability or critical illness happens to the payer i.e. parent, the premiums will be waived. This ensures that coverage on the child doesn’t have to be compromised when things happen to the parents (which will affect the sustainability of the premiums) and the child is guaranteed of a proper coverage for life once it’s set up.
You can download this “Guide to life insurance plans for kids” for a better understanding on the different type of insurance plans that can be set up.
(NOTE: Get our Guide to Life Insurance for Kids for a better understanding on the different type of insurance plans that can be set up. Get your guide Here)
There are more advantages setting up a plan early than delay or procrastination.
Good health is a gift, it’s not an entitlement.
Remember to plan early!!
Article by Sheela Tay Siew Ling (ChFC, AFC)