Life Insurance for a Child

By Malcolm Berko

March 23, 2016 5 min read

Dear Mr. Berko: We are expecting our first child (a son) in about a month, and we'd like to invest about $50 a month in a very conservative mutual fund or stock for his future. A good friend of ours who sells life insurance suggested a $100,000 life insurance policy with a $618 annual premium as a long-term investment. He says that if these annual payments were to be made for 60 years ($37,080), my son would have insurance of $305,000 and a projected cash surrender value of $140,000. He said it would be a good savings program because the annual dividends would not be taxable and they would compound at an average rate of 4.1 percent in 60 years. That would make a nice savings plan for our son's retirement. What would you recommend? — BT, Buffalo, N.Y.

Dear BT: Life insurance has all the romance of a Ty-D-Bol commercial. Not many folks plan for their child's retirement before the kid is born, but that friend gave you outstanding advice. Life insurance is not supposed to be an exciting investment, but if you select the right insurer, it can be among the wisest. Surprisingly, it would be a most extraordinary long-term investment for your son-to-be.

There are roughly 1,000 life insurance companies that sell life insurance in the U.S. They are required by law to maintain sufficient reserves to guarantee the future obligations to their customers. Most life insurance companies are in good financial health, but their premiums, earnings, operating expenses, investment expertise, dividends and long-term policy performances differ broadly. A $100,000 policy with Company A and a $100,000 policy with Company B will both guarantee payment of $100,000 at a specific time. But you must select the insurer that best meets your objectives, and in this instance, The Northwestern Mutual Life Insurance Co. would have the best investment results. Your friend's insurer is only rated A-minus by A.M. Best, BBB by Fitch Ratings and Baa by Moody's Investors Service and might not be the long-term investment you want for your son. In my opinion and in the opinion of many financial professionals, the company you ought to consider is Northwestern Mutual. The long-term performance of a Northwestern Mutual policy might knock your socks off. Both companies would pay the $100,000 policy amount with alacrity, and both checks would clear the bank quickly, without fail. But the similarities end here as abruptly as a rabbit's tail. I think you will find that Northwestern Mutual's numbers are far superior to the policy offered by your friend's company, which we'll call Alpha.

First recognize that Northwestern Mutual, which we'll call NML, has A.M. Best's, Fitch's and Moody's highest possible ratings, whereas Alpha's best rating is that A-minus from A.M. Best. NML's premiums for your son would be $673 annually, so after 60 years, that would equal $40,380. Alpha's annual premium of $618 would total $37,080 after 60 annual payments. With NML, your son would have $452,000 of insurance at age 60, versus $305,000 with Alpha — a significant difference of $147,000. Even more significant is your son's estimated cash surrender value after 60 years with NWL. It is $210,453, versus an estimated $140,000 with Alpha. That $70,453 difference is mighty huge. Last year, NWL paid a 5.6 percent dividend, and Alpha paid a dinky 2.9 percent dividend. Over the past 60 years, NWL policyholders have earned an average annual return of 7.23 percent on their policies, versus 4.1 percent for Alpha during the same period. NWL is a swell investment by any standard and clearly unmatched by any insurer. Last year, NWL paid $5.5 billion in dividends to its policyholders, which exceeds the combined cash dividends paid last year by U.S. Steel, Kroger, Kellogg Co., The Campbell Soup Co., Marriott, Aetna and The Dow Chemical Co.

Your friend represents a good company, so if you wish to do him a favor and purchase his policy, have at it. But an important word of advice: Consider this policy as a cornerstone investment. And consider your son's life insurance a fixed, nonnegotiable expense in the same way you would your mortgage or auto payment. The Alpha policy would do what it's supposed to do if you were to do what you are supposed to do. However, NML would do it much better.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

Photo credit: Phalinn Ooi

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