Opinions vary on the value of purchasing life insurance for children.[1,2] As underwriters, it's not our job to advocate purchasing (or not purchasing) life insurance for children. It is our job to review juvenile applications accordingly once they’re received. Let's talk about some of the non-medical aspects we look at in juvenile applications.
Purpose of life insurance
People purchase life insurance for a number of reasons. In most cases, they buy life insurance to provide their dependents with some protection against financial loss in the event of a premature death. Life insurance coverage can help pay off debts such as mortgages, pay for final expenses, and cover estate taxes. If the primary breadwinner of the family passes away prematurely, life insurance can help replace lost income and cover surviving dependents’ expenses.
Purpose of juvenile life insurance
In fact, in underwriting, one of the questions to think about when reviewing the purpose of insurance is "What is the financial loss here?" An insured child or juvenile is unlikely to have debts and, in most cases, children are not the breadwinners in the family. You may wonder why underwriters care what the financial loss would be. Well, in the unfortunate event a child passes away, aside from paying for final expenses and possible medical bills, the policy proceeds can provide a source of funds for the surviving family, especially if the parents had to miss work. Although the potential financial loss may not be as apparent or direct compared to that of an insured adult, financial loss will occur to some degree when a child passes away.
It should be noted that juvenile insurance applications aren't just about potential financial losses if a child passes. Underwriters suggest purchasing juvenile life insurance for other reasons including
- Locking in a child's insurability
- Future savings/educational planning
Insurance plans for children
Life insurance comes in two basic forms: term life insurance and permanent life insurance. As a general guideline, term products are for temporary needs while permanent products are for long-term or permanent needs.
- Temporary needs may include mortgage or loan and income protection while the applicant's children are young, business insurance, key-man, or buy-sell.
- Long term/permanent needs may include final expenses and estate planning.
For term policies, the policy proceeds are only payable if the insured dies while being covered during the policy’s term. Seeing a standalone juvenile application for a term life insurance product is unusual. In fact, some insurance companies may even have an age limitation for their term products. If a child's family has significant temporary needs, they should be addressed by the parent's insurance coverage, not by the child’s.
Still, a child can be covered by term insurance through a child term rider, that is, as an additional rider coverage on the parents’ plan. This child term rider coverage could come with an option to convert to a standalone plan once the insured child has reached a certain age — the age of majority or an age outlined in the company's product guidelines. Note that the purpose of insurance is less of a concern to underwriters with child term riders because this option is only available to an adult applicant's children (biological, adopted, or ward if the applicant is their legal guardian).
Some insurance plans have a savings and/or investment component to them. These fall under the category of permanent life insurance. It’s common to purchase juvenile life insurance on these plans in hopes the accumulated savings and/or investments will provide a child with sufficient cash value that can be used towards education or other future pursuits.
How much coverage is suitable for a juvenile applicant? There’s no hard limit on how much coverage a child can reasonably apply for, but it’s highly dependent on the parents' own financial statuses and how much coverage the parents have themselves. Referring to your company’s underwriting philosophy will help you determine what kind of coverage to look for in other family members when making your decisions. Anti-selection will always be a concern when it comes to underwriting. A juvenile applicant with underage siblings who aren’t insured equally should be a red flag to the underwriter who ideally should obtain more information to eliminate the possibility of anti-selection.
An application often has more questions such as if other children are in the family, if other children are applying for coverage, if they are already insured, and if so, for what amount of coverage. Even if the application does not contain these questions, if the underwriter discovers the juvenile applicant has siblings (particularly underage siblings) from a different source, for instance, from the agent’s family history questions or comments, it’s good underwriting practice to go back and ask for details regarding the siblings' insurance coverage.
With child term riders, underwriters may be less worried a child has more coverage than a parent, as child term rider amounts are smaller than the parent's base coverage. Nevertheless, it’s prudent to confirm all children in the family are either covered under the child term rider or have equitable insurance coverage elsewhere.
Insurable Interest and Beneficiaries
Aside from business relationships and creditors, a person's parents, spouse, children, siblings, and grandparents are considered to have insurable interest. In most juvenile policies, you’ll see a parent as the purchaser of the policy. But you may also encounter instances when a godparent, aunt, or uncle is seeking insurance coverage on a child. They might be listed as an owner or a beneficiary in addition to payer. How should this be handled?
A priority is to verify if the child's parent or legal guardian signed off on the application for the juvenile insured. If a parent or legal guardian didn’t sign the juvenile application, it may be invalidated. Some companies may request an authorization letter be included with such an application. This letter would be completed and signed by the child's parent(s) and explicitly authorize this person to apply for coverage on their child. Having a legal guardian’s or parent’s signature on the application adds credibility to the information provided by signaling its accuracy and verifying that someone with the child's interest at heart has reviewed it.
If an authorization letter doesn’t include information stating why a non-parent or non-legal guardian is applying for insurance on a child, and the agent's comments fail to provide details either, don't be shy in going back to ask the applicant for clarification why he or she is applying for insurance on a child, what the purpose of the insurance is, and so forth.
As always, underwriting an application comes down to this important question: Does it make sense? If a reasonable explanation has been provided; the proper paperwork has been completed and signed appropriately; and it is in accordance with a company's underwriting philosophy, juvenile applications can still be approved.