February 6 2008

NEW YORK (Money) -- Question: I received an offer in the mail to buy a life insurance policy for my 18-month old daughter for a small monthly premium. As I understand it, the policy would not only build cash value, but double the amount of insurance coverage when my daughter turns 21. Do you think this is a good plan to build for my daughter's financial future or is there a better way? --R.K.

Answer: Let me put it this way. I think almost anything you would do with your money, outside of buying lottery tickets or playing the ponies, would be better than sinking it into a life insurance policy for your daughter.

As I've noted before, life insurance generally makes a lousy investment, in large part because of high fees that drag down returns. This view doesn't make me anti-insurance; quite the contrary. I believe life insurance coverage plays a crucial role in any family's financial plan.

But that role isn't to provide an investment opportunity. Rather, the reason you buy life insurance is because it's the one financial product that can replace income if a breadwinner dies, which allows surviving family members to maintain their standard of living.

But this principle rarely applies to children. After all, unless your daughter is an incredibly precocious entrepreneur or making big bucks doing commercials for disposable diapers, you're not relying on earnings from her to support your family. So while your daughter's death would obviously be a personal tragedy, it wouldn't be a financial one.

In short, it makes little sense for you to devote your money to something that doesn't make it as an investment and that provides life insurance protection for someone who doesn't require it. So what should you be doing to give your daughter a leg up financially?Plan for your future

Well, the single most important thing you can do is to make sure your own finances are in shape. After all, the more precarious your financial situation is, the more difficult it will be for you to give your daughter all the things I'm sure you want her to have: a good education, a nice home, a chance to experience the wider world and, perhaps most important, a sense of security and stability.

Source : http://money.cnn.com/