A gift your children won’t thank you for anytime soon

A gift your children won’t thank you for anytime soon

At first glance, thinking about life insurance for your children can be a bit unsettling. But, it’s actually a great opportunity to be proactive, as life insurance is an important part to any financial plan.

Growing up, your kids won’t appreciate what you’re doing for them.  Don’t they understand that you are putting a plan in place for them for when they have kids one day!? You’re helping them cover off the two of three reasons why families don’t achieve the goals they envision!

  1. Living too long (outliving retirement savings)
  2. Dying too soon (leaving family with financial burden)
  3. Getting sick/disabled

Here are a few reasons why looking at life insurance for your children at a young age can be a good idea.

Insurability

Most people purchase a life insurance policy when major key life events occur. The most common ones are when you get married, when you buy a home and when you have children. The assumption here is that you’re able to get life insurance.  We all know someone (or multiple people) who have had health issues at a young age. What this means is that although they now see the need for life insurance, they may not be able to get it.

Insuring your children at a young age means they will always have coverage, no matter what happens to their health in the future.

Cost

Simply put, life insurance rates are correlated to your age. The younger you are, the less expensive life insurance is. Permanent life insurance is extremely affordable for children and the best part is that you can truncate the premium schedule (think of a mortgage amortization schedule). This means you can pay off all the premiums over a fixed amount of time, leaving your children with coverage that continues to grow. As an example, you could set up a whole life insurance policy where the premiums are paid off in 20 years. When your children are old enough, you can transfer ownership of the policy to them and no additional premiums will be required. They will have permanent coverage that grows each year.

Tax-free / tax-deferred savings plan

You’re maxing out your children’s RESPs and your wondering how else you can save and grow money for their future, while deferring tax. Permanent life insurance policies act as a tax shelter where a cash value grows on a tax-deferred basis. With a participating whole life policy, the insurance company pays a dividend each year to its policy holders. Typically, the annual dividend is used to purchase additional insurance (paid up additions). This also adds to the policies cash value which can be accessed for future needs. 

The cash value can be accessed in two ways:

  1. Borrowed – This can be done on a tax-free basis, like a line of credit. Any outstanding loan amount at death will be subtracted from the policies death benefit
  2. Withdrawn – The amount withdrawn is taxed as income. It is ideal to withdraw cash values during low income earning years, such as retirement (like an RRSP)

Remember, if the cash value is never accessed the policy will continue to grow on a tax-deferred basis and pay out tax-free to your children’s beneficiaries.

Legacy to your future grandchildren

As mentioned, if your children never access the cash value in their life insurance policy, it will continue to grow and pay out tax-free to their beneficiaries one day. Their beneficiaries will likely be their children. In essence, you’re providing a legacy to your future grandchildren.

Illustrative Example

You and your spouse have decided to commit $2,500 / year for the next 20 years to a whole life insurance policy for your newborn son.  That is a total of $50,000 over the next 20 years, after which the policy is fully paid up. The base amount of life insurance coverage is $215,000.

By year 35 (when your son may be looking to purchase a home) there is $120,000 of cash value that can be accessed, and the death benefit has grown to $492,000.

By age 70 (when your son may be looking for retirement income) there is $680,000 of cash value that can be accessed, and the death benefit has grown to $1,000,000.

If your son never touches the cash value, the policy will be worth $1,600,000 at age 90 that will pay out tax-free to his beneficiaries.

*The above example assumes that the dividend rate today is held constant

Conclusion

Life insurance for your children is a wonderful way to start their journey into financial planning. It may not be something they appreciate while they are young, but I can promise you they’ll be thankful as they get older. It reminds me of how every Christmas growing up my dad would buy my brothers and I a tool. At first, I thought nothing of it – but now that I own a home and have a full tool set, I am extremely thankful.

For more information or questions about life insurance rates, please feel free to reach out.

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The above picture was taken during our time in Nepal. Part of our guided tour included an option to take a flight up to see the Himalayas. What an experience that was. We were in a 15(ish) person prop plane with a guide who was pointing out of the famous mountains along the range. The picture above is a photo I snapped from inside the plane showing the peak of Everest. I figured this was the next best things considering I will never climb Everest myself! A word of caution if you decide to do this… I have never felt turbulence like I did that day. A somewhat scary ride but well worth it.

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