Life insurance for children: It’s not a scam

Juvenile life insurance. You've seen it before; those three words almost always wind up on lists of the worst insurance products to buy.

If life insurance is primarily used for income replacement, these lists reason, why in the world would a child — assuming, of course, the child is not the family breadwinner — need life insurance?

The truth is that there are many reasons why juvenile life insurance makes perfect sense for your clients, and they have nothing to do with income replacement. Let's start with the basics:

The death benefit. Juvenile whole life insurance policies began back in the 19^th century as a way for the impoverished classes to pay for funeral and burial costs. As the infant mortality rate was high during that time, these policies made a great deal of sense.

But today, infant and child mortality is very low in the United States. (It was just eight per 1,000 live births per year for children under age the age of five in 2011.)

Therefore, the detractors focus on the very slim chances of needing the death benefit, which is typically $5,000 to $50,000. And while I agree, it's still a possibility, and most of the cost and value of the policy has little to do with this unlikely outcome.

Guaranteed future insurability. You'll read that the chances children will develop a chronic illness and be denied life insurance coverage in the future are unlikely, based on future advances in medicine.

In fact, while the medical field has indeed focused on (still costly) therapeutic advances for chronic conditions, cures are developing at a much slower pace. Before turning 20, children and young adults have a little more than a 1 in 300 chance of getting cancer. Also, about 1 in every 400 children under the age of 20 has diabetes. To address this challenge in the health insurance industry, an entirely new federally mandated solution has been developed.

See also: Life insurance is for kids

If there's a history of chronic or terminal illness in a client's family, guaranteed insurability into adulthood is a definite need, not a want. These policies can be maintained after a child becomes an adult — throughout his or her lifetime — regardless of health status.

We've all witnessed the hurdles in attempting to get someone with medical conditions insured, especially at a rate that fits the budget. Enough said.

Cash value. An important benefit of juvenile whole life policies is that they provide cash value accumulation over the long term. What you'll read is that this type of policy comes with fees, service charges and commissions, and that it'll be a while before the cash value even starts to accumulate.

While this is true in the early life of the policy — as is typical with most cash-value life policies, not just ones for children — the rewards are reaped as the policy matures. As long as premium payments continue, the cash value on a child's life policy has a guaranteed, predictable rate of return.

With today's low interest rates and market volatility, that's a benefit your clients will appreciate. A 3 percent to 5 percent rate of return over 20 years is safe and secure, and much better than they will achieve with other low-risk investments.

Also, policies allow loans against the cash value at any time. This provides flexible access to cash value. Also, current FASFA (Free Application for Federal Student Aid) applications do not require the disclosure of cash value life policies when assessing a child's need for financial aid.

Another angle to consider is that the cash value creates a financial head start for a child and should be thought of as a purposeful gift from a parent or grandparent. More than half of grandparents rate financial security as a foundation for success in life, and gifting life insurance to their grandchildren can leave a legacy that will support their financial responsibility and protection.

And now let's talk about the not so obvious benefits of children's life insurance, the things those articles seem to always omit:

Locked premium rates. What often goes unmentioned — and another reason these policies are solid long-term investments — is that if your client purchases a whole life policy for his or her child, the low childhood rate is locked in for the life of the policy.

Let me repeat that: if the policy is kept in force throughout adulthood, your client can secure a very low, fixed-rate premium. If the policy isn't kept in force, the child, as an adult, will be subject to age-band rating, rate-ups for certain medical conditions or tobacco rates.

In addition, as the child grows older, certain policies offer an increase in the death benefit — sometimes without an increase in premium — allowing the policyholder to have more coverage.

Important tax advantages. While the proceeds of a juvenile life insurance policy are income tax free to the beneficiary, there's another substantial tax benefit when a parent or grandparent pays the premium. The annual gift tax exclusion allows taxpayers to make gifts of up to $14,000 per person in 2013 without any federal gift tax liability. This exclusion can basically pay for the policy premium.

This insurance isn't for everyone. But if your clients have disposable income and children or grandchildren, and are looking for insurability protection, access to cash value, and a few tax benefits, juvenile whole life insurance could be the perfect product to add to your sales portfolio.

And if your client tells you he or she has read otherwise, you can confidently respond to concerns and make sure your client has the complete story.