At infineo, we specialize in designing life insurance policies for children. Specifically, our agents are trained in the use of our customized “Child Millionaire” software, which allows clients to quickly sketch future scenarios for college funding, legacy building, etc.
But while studying a recent home office illustration of a Whole Life insurance policy issued on a (hypothetical) newborn, I realized that we need to slightly adjust our mental framework when thinking about this product. Even when issued on a newborn, a plain vanilla Whole Life policy serves as an excellent cash management vehicle; in a prior article, I explained it for the case of adult policies. To be clear, everything I’ve written on Whole Life before is still valid, it’s just that applying these principles in the case of child policies might at first appear more mysterious.
The most basic mystery with a child policy is this: How does a parent (or grandparent) have an insurable interest in his or her (grand)child? It obviously makes sense to have life insurance on the parents of little kids, because they are the breadwinners in the household. Even if (say) the mom stays home to watch the kids, it still make financial sense for the husband to have life insurance on his wife, because if something happened to her he would need to either cut back his own work hours, and/or hire a nanny. Either way, his wife as stay-at-home mom definitely contributed financially to the household, and so she should be insured just like the cars. It would cost the husband real money if something happened to his wife. (Obviously I’m deliberately leaving aside emotional considerations for the moment, and looking at the situation purely as a bean counter.)
But that logic doesn’t seem to apply to little kids, does it? If anything little children are a financial drain on the household. Viewed purely in narrow financial terms, it’s hard to see how a tragic fate would make the household have a lower net worth.
Even though this might at first seem reasonable, it’s incorrect. It does make sense—even in narrow financial terms—for the household to take out insurance on the life of a newborn. (I will explain this in the final section on legacy building.)
Beyond that, there is obviously the emotional element, and there’s nothing “uneconomic” about it. The point of insurance, in general, is to compensate the owner in case of a loss. So long as the insurance company correctly predicts the likelihood of the loss, the mutual benefits of insurance can occur. (Economists would describe it by saying risk-averse individuals unload their risk onto the shoulders of risk-neutral insurance companies, at a price where both sides walk away happier.)
So in principle, if someone has a $50,000 emotional attachment to (say) a watch left to him by his Uncle Walken, and if the actuaries could correctly calculate the odds of it being reported lost or stolen, then it would make sense for the insurance company to offer a policy of protection. And if the person genuinely valued the watch at $50,000—by which we mean, for example, that if someone offered to buy it for $45,000, that the owner would say “no thanks”—then that person would happily pay the premiums to keep the policy in force, just like the homeowner doesn’t resent paying for fire insurance.
However, in practice you have to demonstrate a quantitative amount of “insurable interest” in order to take out a policy. You wouldn’t be able to simply declare that you value Uncle Walken’s watch at $50,000, because otherwise it would be too easy for people to give bogus valuations and then “lose” their $50,000 watch.
This also explains why you can’t take out a $60,000 auto insurance policy on your Toyota Corolla, but you can take it out on your Tesla Cybertruck. In the case of the former, it would be too easy for people to report their cars “stolen” or to deliberately crash it. And these considerations underscore all the more why you aren’t allowed to buy a new insurance policy on a stranger’s car.
Circling back to child policies, it is clear that there is a presumption of significant emotional attachment of a parent or grandparent to a child or grandchild. Furthermore, the monetary estimate of this attachment goes up, the wealthier the parent or grandparent.
To be clear, I AM NOT saying that rich parents “love their kids more,” or that properly scaled life insurance makes someone “restored to even” after a loved one dies. No, I am speaking purely in terms of the principles actuaries and economists use when analyzing the life insurance market. For an analogy, as an economist I can explain why the market price of a Bible is lower than the market price of a kilogram of cocaine. That explanation has nothing to do with intrinsic value or ethical worth. So that important distinction applies in all of my discussion of life insurance.
The media often depicts power-hungry families driven by a quest for wealth and prestige. A classic is the Corleone family from the Godfather movies, and more recently Kevin Costner plays the rugged yet ruthless patriarch in the hit series Yellowstone. And in real life, we have the Kennedys and the Rockefellers. Although the public is fascinated with their exploits, they wouldn’t want their own families to be like them.
However, let’s not throw the baby out with the bathwater. The problem with Don Corleone isn’t that he amassed a great fortune, or that he acts as a dispute resolver and lending facility for his extended family. No, the problem with Don Corleone is that he steals and kills people.
Indeed, given that there are rogue families out there, building a fortune and rigging the system against middle class households, the best thing you can do for your children and grandchildren is to give them a fighting chance, by starting (or fostering if it’s already in place) an intergenerational legacy.
In this context, where you are effectively starting a heritage fund for your descendants that is expected to grow as it’s passed down through the generations, a premature death definitely does pose a financial loss. Viewed from the standpoint of a family dynasty, the money that a parent spends on food, shelter, private school, etc. is an investment in the productive capacity of a future steward of the family assets. And viewed even at the moment of birth, the newborn in the family has a positive net present value to the enterprise; his or her contributions in the prime working years will more than pay for the upfront investment.
So when viewed in this framework, taking out a large life insurance policy on a newborn is just as rational as insuring bottles of fine wine sitting in the (climate-controlled rooms in the) warehouse that might not be sold for decades.
When we think of a newborn in this light, it makes sense that the “value to the rest of the family” of the newborn starts out a sizable value (in the tens of thousands even for a middle class household), and then rises over time as the child ages. And although I won’t post an actual illustration here, this is indeed the pattern you see in a standard Whole Life child policy design.
In future posts I’ll go through a specific numerical example of a Whole Life child policy, and how it could be integrated into a series of policies for the purpose of legacy building. In the meantime, interested readers can contact us for applying these ideas in your specific circumstances.
NOTE: This article was released 24 hours earlier on the Infinite Banking (IB) 3.0 - The Future of Finance Group on Facebook.
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together Whole Life insurance policies and digital blockchain-based issuance.
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