Dec 9, 2024
For some parents, taking out a whole life insurance policy on their child can seem like a good investment — but there are a few factors that should be considered first.
In short, whole life insurance policies are permanent plans that last your child’s entire life and don’t expire. They’re also locked into a fixed yearly premium that never increases.
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But what if you eventually regret your decision — which is exactly what happened to one Redditor.
According to their post on the social media platform, they took out a $150,000 whole life insurance policy for their then-one-year-old and have been paying $118 a month for the last year. All told, they’ve sunk about $1,500 into their policy so far and want to cancel.
However, if they surrender their policy now, they’re looking at only getting a measly $30 back.
They were told they could decrease the policy to $50,000 for $60 a month, or convert it to another policy (most likely a term life policy, although the post doesn’t specify). The question is, what’s the best course of action in this instance?
The problem with whole life insurance
Whole life policies consist of two parts: the death benefit — which is the lump sum your beneficiary receives — and cash value, which is a built-in savings and investing feature.
While there are certainly plenty of benefits — such as tax breaks, fixed premiums, and potential loan collateral — it's important to understand all aspects of whole life insurance policies before making this important financial decision.
Because whole life insurance offers both lifelong coverage and a cash value, it tends to be considerably more expensive than term life insurance.
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In fact, personal finance celebrity Dave Ramsey explained that, in the first three years alone, these policies can be 20 times as expensive as a term life policy that provides similar coverage.
PolicyGenius reports that the average cost of whole life insurance is $440 a month for a healthy 30-year-old with a $500,000 policy.
While these policies come with a savings feature called cash value (which you can borrow from when you’re alive), that monthly rate is significantly steeper than a term life policy rate.
In general, whole life policies are considered an unnecessary investment by many financial experts as their primary purpose is to pay out a death benefit to the beneficiaries in the event of the person’s death. But once the child is an adult, most parents wouldn’t need a death benefit to stay afloat financially in the event of the adult child's passing.
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When is whole life insurance a good idea?
Whole life insurance can be a good idea for people who can afford the higher monthly premiums. That's because a whole life policy’s cash value can be a form of forced savings.
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Whole life insurance could also be a savvy move if you have a dependent with a disability. If you're buying life insurance to protect your children financially, a 20- or 30-year term policy could suffice under most circumstances, since that carries you through to when they become adults. A child living with a disability may need lifelong care, though, so you may need a more permanent policy because of that.
Instead, many parents purchase small life insurance policies on their children to help cover funeral costs in the event of the unexpected death of the insured child. But due to the cost of whole life insurance, it typically doesn’t make sense to put it in place for a young child, especially one who is still a toddler.
What to do if you regret buying whole life insurance
If you regret buying a whole life insurance policy for your kid, your best bet is to reach out to your insurance company and ask what options you have. You may be able to convert your policy to a term life policy or reduce your policy's death benefit to lower your premiums.
You can also choose to cancel your policy if you can't afford it or realize it doesn't make sense for you. However, in that case, you'll be subject to a surrender fee.
If the surrender fee exceeds your policy's cash value, you won't get anything out of it. Otherwise, you'll typically get your cash value minus the surrender fee.
As for the aforementioned Reddit situation, due to the policy being fairly new, they are looking at a mere $30 cash value if they cancel their policy. However, given the cost of the monthly premiums, and the fact that they’re only a year into investing, losing out on the $1,470 they’d invested may be the best bet — even if it is a bitter pill to swallow.
However, this can be a far better option than continuing to set aside good money for a bad investment.
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Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
