By Pascale Hansen

When it comes to funding a buy-sell agreement, business owners are faced with several options. One of the most cost-effective Are you a new parent looking to secure your child's financial future? Beyond mastering swaddling techniques and navigating sleepless nights, investing for your newborn's future is a crucial step that often gets overlooked. While many families consider college savings plans like the RESP or 529 Plan, have you ever thought about the benefits of a life insurance policy for your child?

The idea of life insurance for children may seem daunting at first, conjuring images of worst-case scenarios. However, with a permanent life insurance policy, there is more than a death benefit - there is a savings and investment component that can provide your child with the funds not only for education, but for starting a business, traveling the world, or funding their retirement. You can think of it as a super-charged TFSA (for Canadians) or Roth IRA (for Americans) that can ensure your child's future, no matter what life may bring.

Whether you're a parent or grandparent, investing in life insurance for your young ones can offer a unique opportunity for long-term financial growth. This article will delve into the reasons why a life insurance policy may be a valuable addition to your child's financial portfolio, comparing it to traditional college savings plans. Don't miss out on this chance to set your child up for success from the very beginning of their life.

What Is Life Insurance for a Child?

Life insurance is a contract between an insurance policyholder and an insurer. As noted above, permanent life insurance has two components: the commonly known component of a lump sum payment in the event of death and the lesser-known savings and investment component.

The cost for the insurance is called the “premium”. When you pay the premium, a portion goes to pay for the cost of the insurance (or the death benefit), and the rest is invested and generates a return. You can think of the portion being invested going into a bank account where you can observe the value increase over time. This is called the policy’s “cash value”. Permanent life insurance builds cash value over time.

The beauty of having permanent life insurance is the “cash value”. You can access the cash value while you’re alive by getting a line of credit or a collateral loan (a bank loan secured by the policy). It is similar to owning a home which has an appraisal value and borrowing against that value in the form of a line of credit or a loan. Your home’s value is being leveraged to get access to cash and doesn’t affect the value of your home. By taking a line of credit or a loan, you can access the value of the policy for any purpose. The main benefit of this scenario is that you can defer the payment of all interest until the death of the insured person. At that time, any amounts owing for the loan and interest are deducted from the death benefit. For example, if you had a $1 million policy, and you borrowed $100,000 in loan and interest, when the insured person passes away, the bank would be paid $100,000 and the beneficiary would receive $900,000.

There are several other benefits that make permanent life insurance an incredible option for wealth creation. Your money grows tax-free, returns can be guaranteed, the value is creditor-proof, the money can be used for anything, and in general, there is much less downside market risk compared to any other investment choice. Additionally, the premium payments can end after 10 or 20 years but the money continues to grow. It is also important to note that the person who owns and pays for the policy makes the decisions. While this may start as an investment you plan to gift to your child for their future, you also have the option to use this investment for yourself (for any purpose, project, initiative, or retirement), if you decide to do so.

Types of Life Insurance

There are two main types of permanent life insurance: Whole Life and Universal Life.

Whole Life Insurance

Whole life insurance has a fixed premium and death benefit. The cash value within a whole life insurance policy builds at a fixed interest rate, which gives whole life more predictability than universal life policies.

Whole life insurance can be a good decision for you if you want guarantees and cash value that grows at a steady rate. The predictability of whole life insurance is well-suited for those who don’t want to make investment decisions. The investment is passive. Whole life insurance costs more than universal life insurance because the premium payment amount, death benefit, and the minimum growth of the cash value are guaranteed. In addition, with whole life insurance, you have the option of receiving life insurance dividends.

It is crucial to purchase whole life insurance when a child is young to make it more affordable and also to be able to build up predictable value over as much time as possible.

Universal Life Insurance

Universal life insurance allows you to adjust both the premiums and the death benefit to fit your needs better—within certain limits. Universal life insurance could be a good purchase for someone who wants a permanent policy that offers flexibility, which allows you to increase/decrease the death benefit and premium based on your financial situation at any given time. It may also be a wise choice for a person interested in taking a more active role in choosing their investments.

Which Type of Policy Is Best?

Whether whole life or universal life is better comes down to your desired stability or flexibility as well as what you can comfortably afford.

Here’s a sample scenario of a whole life insurance policy on a newborn baby girl (1-month-old) with a monthly premium of $275, paid off in 20 years. As you can see, the premium payments stop when she is age 20. The cash value has been accumulating over the 20 years since payments were made and will continue to do so after payments stop. Additionally, the amount of the life insurance coverage (what will be paid if the person were to pass away) also increases over time. If you were to use the cash value, the death benefit would decrease.

Freedom & Flexibility vs. Government Restrictions

As outlined above, investing in whole life or universal life insurance policies for your child can give you access to cash that can be used for education and other milestone investments. On the other hand, purchasing an RESP or a 529 Plan limits the use of your saved and invested funds for educational purposes and subjects your money to extra government rules and restrictions.

Key points of comparison are listed in the tables below for both Canada (RESP) and the USA (529 Plan).

Below is the comparison for the USA (529 Plan).

How Does Buying Children’s Life Insurance Work?

Just like a typical adult life insurance policy, a children’s life insurance policy is a contract with an insurance company that involves paying on either a monthly or annual basis. The contract stipulates that the insurance company agrees to pay a tax-free, lump sum death benefit when the life insured passes away and illustrates the projected cash growth within the policy. The insurance company will automatically ensure that the cash growth remains tax-exempt.

For most adult life insurance policies, the policyholder (who owns the policy and is responsible for the payments) tends to be the insured person covered by the policy. When it comes to life insurance for children, however, the policyholder (owner) is the child’s parent, grandparent, or legal guardian.

The process of purchasing life insurance for a child is typically quicker and simpler than buying life insurance for an adult because no medical exam is required and the application can be submitted electronically.

A parent or guardian can purchase a life insurance policy for a child as young as 15 days old in Canada and 14 days old in the USA. You have the option of paying off the policy over a certain period of time, typically over 10 or 20 years. The ownership of the life insurance policy can be transferred to the child once s/he is an adult, giving her/him a head start in wealth creation and the means to access the cash for education, a down payment on a home, travel, to start a business, for retirement income or anything else. As noted above, the owner does not need to transfer ownership and can retain the investment for their own purposes or needs if they so choose.

What Are the Advantages of Investing in Children’s Life Insurance?

1. Guaranteed Future Insurability

Parents can guarantee their children’s insurability, irrespective of any future health conditions that may arise, when they get a policy early. This can be of critical importance for families with a history of medical issues or genetic predispositions. Children’s insurance typically has the option to purchase additional insurance coverage at fixed rates, without undergoing medical examinations or underwriting as an adult. In essence, this means parents, grandparents or guardians can lock in a child’s ability to access insurance coverage regardless of what the future holds.

2. Lifelong Coverage

Permanent life insurance offers the peace of mind of continuous protection and financial security well into adulthood and the next generation.

3. Affordable Premiums

Life insurance premiums increase with age, so the younger you are, the cheaper it will be (assuming you’re healthy). It also allows a parent to pay off the policy before the child is an adult.

4. Guaranteed Investment Returns

The right type of life insurance policy can offer contractually guaranteed returns without the need for picking stock or bonds or worrying about the roller coaster ride of the stock market.

5. Accumulation of Cash Values

As premiums are paid, a portion of the payments goes to build cash value within the policy much like a super-charged TFSA or Roth IRA.

6. Financial Flexibility for Future Needs

It’s not until your child matures into a young adult that you will know where their dreams, talents, and aspirations will take them, which is why the key feature of investing in a life insurance policy is the incorporated cash value which has no restrictions. The cash value can fund a dream of entrepreneurship not just college or may be a financial cushion keeping them out of debt during challenging times.

7. Building a Strong Financial Foundation

Investing in life insurance as part of a larger, holistic financial plan for your family, can be the foundation for wealth creation for future generations. That’s exactly what the Rockefellers did and we can help you do that too.

Factors To Keep in Mind When Purchasing Life Insurance for Children

1. At Least One Parent or Guardian Has to Be Insured

To purchase life insurance on a child, at least one of the parents has to have their life insured and the maximum amount of life insurance that can be purchased will be half of the amount of one of the parents or guardians.

2. Siblings Have to be Treated Equally

When your second child is born and you want to buy a policy for them, you have to purchase the same coverage as you did for their sibling.

3. Assessing Financial Capacity

Whenever you’re purchasing life insurance it is essential that the premiums are what you can comfortably afford in the long term in addition to the other costs of raising children. If you’re living pay cheque to pay cheque and having trouble managing your finances, work on that first.

4. Comparing Policy Options

We highly recommend working with an insurance broker who understands the life insurance landscape and your unique needs. They will be able to shop the market and make the necessary comparisons to make the best recommendation to suit your needs.

5. Make the Right Choice for Your Family

While life insurance for your children is not required, it could be the right choice to protect your family in case of disaster and to set up your children for future success.

The right choice will come down to your values, your goals, and the specifics of your particular financial and familial situation.

To learn more about life insurance policies for children and individualized guidance pertaining to you and your family book a call here: https://bit.ly/3LMU0YU

We’ve got the expertise to help you make the right insurance decisions so you can feel excited about the many options you’re creating for your children’s future.

Pascale Hansen is the Founder, CEO, and Financial Strategist at Zada.

#babylifeinsurance #kidseducation #wealthcreation