Your kids don't need life insurance

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?

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.

You can begin building that solid financial foundation by stashing away enough money in a money-market fund or savings account to cover about three months' worth of living expenses. This sort of reserve will allow you and your family to weather emergencies such as unexpected medical problems or financial setbacks like a layoff with minimal disruption to your lifestyle.

Beyond that, you also want to start putting away money for your retirement. If you've got a 401(k) or similar plan at work, contribute at least enough to collect any matching funds your employer may offer. If you don't have such a plan, do an IRA. If you can, do both. (You'll find advice on ramping up your retirement savings by clicking here. For more on IRAs and other retirement savings opportunities, click here.)

And let's not forget about life insurance - not for your daughter, but for you and/or your spouse. The idea is to have enough coverage so the family can carry on as normally as possible should you or your spouse die, but not so much that paying for it would prevent you from saving for the future. Deciding on the right amount is as much art as science, but you can arrive at a reasonable estimate of what you need with a "life insurance needs" calculator like this one.

Whatever amount of coverage you decide on, you'll want to get it through bare-bones term insurance. This type of policy pays a death benefit but has no investment component. As a result, you get more insurance protection for your premium dollar. You may already receive some of this type of coverage at no charge through your employer. If that's not the case - or if what you get isn't enough - you can check out the cost of coverage from different insurers by going to sites such as IntelliQuote and Insure.com.

If you can manage all this and you still have money left over, then you can begin looking into more direct ways of providing for your daughter's future, such as saving for her college education via a 529 savings account or other plan. (For details on the pros and cons of various alternatives, click here.)

And, of course, at some point when your daughter is older, it wouldn't hurt to teach her the basics about managing money, so she'll be better prepared to handle her finances when she goes out on her own (although, as my colleague Stephen Gandel pointed out in a Money article last year, teaching kids about finances is easier said than done.)

But as for that life insurance pitch you got in the mail, I'd say you should just ignore it. Your daughter doesn't need the policy, and you don't need to waste your money paying the premium.