Life Insurance From The Cradle

'Gee, thanks, Dad, it's just what I wanted--life insurance!"

You can bet no child unwrapping birthday presents will shout those words. But some insurers, facing a shrinking market of young adults, are urging parents and grandparents to give kids their own policies. Low mortality rates for children mean you can buy a sizable amount of coverage for a relatively small, onetime premium. And some of your money gets set aside for long-term growth via interest and dividends, eventually providing the youngster with funds for college, starting a business, buying a home, or even retirement.

'LOW ENTRY.' A big selling point is that insurance investments grow tax-deferred. Some alternative ways to start a child's nest egg--giving Treasuries or municipal bonds, perhaps--also have tax advantages. But insurance salespeople can use "low entry cost" as an added lure (box).

For example, state regulations let savings banks in Connecticut, Massachusetts, and New York offer $50,000 children's policies for only $2,500 (for a 1-year-old girl) to $3,400 (a 5-year-old boy). As dividends pile up, the amount that would be paid at death climbs above $100,000 by age 18, above $1 million at 65. And a policy's cash-surrender value grows, too--reaching $10,000 to $13,000 by age 18, and about $600,000 by 65. Or, for only $630 to $750, 2-year-olds can be given $10,000 policies with a cash value projected to hit $120,000 at age 65.

In most states, children's policies require a somewhat larger investment because they must conform with recent restrictions on adult single-premium contracts. For example, $5,000 put into William Penn Life's Crusader II provides an infant with $175,000 worth of coverage plus a cash-value fund projected to hit about $15,000 by college time. If he or she keeps holding the policy, the fund should near $675,000 by age 65, $1.5 million by 75.

COLLEGE FUND. True, $15,000 may not go far toward college costs 16 years or so down the line. So if your chief objective is to fund a child's education, an insurance contract--which typically guarantees interest of 4.5% or less--might not be the best choice. Instead, putting $5,000 or $6,000 in zero-coupon Treasuries at 8% would return about $25,000 for school costs, notes Prudential Securities Vice-President Peter Perrine. Putting $7,000 in tax-free munis--at currently available rates of 6.5% to 7%--would produce a similar result.

Of course, other gift investments don't include insurance's death benefit--something most people find hard to say in the same breath with "baby." But the industry is matter-of-fact about it. If you buy your year-old grandson a policy, don't be surprised to see it read: "Male, Age 1, Nonsmoker."