Insurance for Your Child's Future
Posted 02 Sep 2016 by Melissa Allan
The idea of having a life insurance policy on your child or grandchild is one that makes many clients feel uneasy, particularly at the prospect of its potential necessity. I’ve had many experiences where I’ve brought it up to parents as a rider on their policies and I get the “deer in headlights” look. While the idea of having a life insurance policy for your child or grandchild may make you feel uncomfortable, it may not be a bad idea for several reasons.
The first, of course, is the unsettling prospect that there will be a monetary loss if something was to happen to your child. You would miss work, pay for a funeral, etc. Life Insurance protects us from the “what ifs.”
Another good, and less morbid, reason to consider this insurance is to help provide your child with a sound financial future: using the policy as a nest egg for their future.
For illustration purposes, I did a quote on a 2 year old girl whose grandparents want to take out an insurance policy on her. The cost for a $25,000 whole life insurance policy would be $324.25 a year (based on a standard risk) under the enhanced legacy guaranteed 20 pay product with Great-West Life. This means a total of $6,485 in premiums over 20 years equals a guaranteed death benefit of $25,000 whether the insured dies in 1 year or 100. However, some companies continue to have participating whole life policies which may pay annual dividends. In this case, I have selected paid up additions as the dividend option. By the time this child is 32, the death benefit would be equal to $79,764 ($25,000 base coverage + $54,764 in paid up additions) under the current dividend scale. These paid up additions are NOT guaranteed but the $25,000 base coverage is. These paid up additions have a cash value associated with them as does your face amount death benefit. At the end of year 30 the projected cash value (guaranteed and non-guaranteed) on the policy is $14,857. There are many options to choose from with this cash value. The policy can be surrendered, there can be a partial withdrawal* of the cash associated to the paid up additions, you can borrow against the policies cash value, etc.
This example illustrates good death benefit coverage and cash value growth on the $6,485 premium investment and protects the child against future insurability issues that cannot be foreseen in the event their health changes and they’re unable to qualify for insurance. It gives them options to consider down the road (take cash for a down payment on home, transfer the policy to them as a wedding gift or on the gift of a great grandchild*, etc.)
Another potential avenue of planning for your child, you can add guaranteed insurability riders to a whole life insurance policy, or a child protection rider can be added to a parent’s policy on their child. This child protection rider is very affordable with most carriers charging under $5.00 a month. It insures the child for a modest amount of coverage but a big benefit is that it guarantees they can convert this to up to $250,000 of insurance without medical evidence later in life. There are rules around this rider which we’ll cover in another newsletter but it is available for consideration as well.
I generally feel, in most situations, the first avenue for investing in a child’s future would be an RESP but some people are already maxing out the $2,500 contribution to get the maximum annual $500 government grant. Hopefully many more parents are doing this now with the new CCTB payment enhancements. Perhaps grandparents want to do something too!
One thing is clear, in my experience I have never met with a child who had a parent take out an insurance policy for them, who said “I wish they didn’t do that.” Each time I have had this happen it’s been followed by a smile and appreciation for what their loved one did for them.
If you would like more information on such options, please get in touch!