Do Newborn Babies Need Life Insurance?

There are two things new parents can count on: a lack of sleep and a mailbox full of solicitations. While some adverts could come in handy — After all, who would sneer at a coupon for Huggies? — others should be approached with caution.

Consider life insurance for a newborn. Here's the pitch: Buy a policy for your child today and you can provide him or her with a "financial head start." Not only are rates cheap, but you can also guarantee your baby's future insurability, no matter what illness should later strike. And if the unthinkable happens, the proceeds would cover the child's burial costs. The icing on the cake: if he or she grows up to be healthy and strong, you haven't thrown any money away. Provided you bought a whole life policy (rather than a term policy), your adult child can tap into the cash value in the future.

Sounds convincing, right? This helps explain why several million American households own such policies.

But consumers should think long and hard before signing on the dotted line. Most experts agree that while buying life insurance for a child might offer parents some peace of mind, it isn't a savvy financial move. In fact, James Hunt, an actuary with the consumer advocacy group Consumer Federation of America, says "it's never a good idea."

Let's start off with why people need life insurance in the first place. An insurance policy is primarily meant to protect the income of the family's breadwinners, says Paul Graham, chief actuary with the American Council of Life Insurers (ACLI). The idea is that, should one or both of them die, their dependents could continue to live comfortably.

Protecting a child's life doesn't fall under this category. While we certainly value our children, they're technically liabilities, not assets that need protection, says Elaine Bedel, an Indianapolis-based certified financial planner. Unless you're a stage parent, you probably aren't counting on Junior's income to help put food on the table.

What about future insurability? Only in very rare cases would a person in his or her 20s or 30s have a difficult time buying life insurance. Even those with ailments ranging from juvenile diabetes to heart problems can find coverage. "There are niche companies that specialize in high-risk insurance," says Graham. "If you look hard enough, most conditions are insurable." Granted, it will cost him a little more than a healthy person. But buying a policy while your child is an infant doesn't solve this problem. That's because the face value of juvenile policies tends to be quite low, often just $5,000 to $10,000. "A child out earning a living and having dependents will need a lot more than that, so it guarantees a meaningless amount for future insurance," says Hunt. Even Gerber Life's max of $150,000 would have to be supplemented considerably in 30 years.

A whole life policy doesn't make a good piggy bank, either. In fact, Globe Life and Accident Insurance Company, one of the largest providers of juvenile life insurance, says infant policies should be sold primarily as an insurance product — not as a savings vehicle. Whole life insurance policies are laden with hidden fees and costs. That's why SmartMoney.com recommends term life insurance for most consumers, which allows them to put the extra money they would have spent on a whole life policy into a 401(k), IRA or another long-term investing vehicle. (For more on life insurance, click here.) The main exception would be people who are looking for a tax savings vehicle for a large estate. (For more on estate planning, click here.)

Children's insurance, in particular, is disproportionately expensive compared with the benefits gained, says Consumer Federation's Hunt. If you're looking to set aside a little money for, say, college, a 529 plan would be a better choice, says certified financial planner Bedel. The savings are tax-free at the federal level if used for education — and depending on the state, you might even get an upfront tax break. (For more on college savings, click here.)

Most important: Parents should make sure they have enough life insurance for themselves. The biggest mistake people make is buying a policy for a child when they are underinsured, says Hunt.

Life insurance is one of the rare cases when parents' needs should, indeed, come first.