As a parent, one of the many challenges you face is finding a way to ensure your child’s financial security over the course of a lifetime. Permanent life insurance can be an effective and flexible tool to create a legacy and a secure future for your loved ones.
The tax efficient growth and attribution rules of life insurance, combined with a long time horizon, allows parents and grandparents to build a substantial nest egg that can be used by their children or grandchildren when it comes time for them to retire.
Life insurance is also an effective way to supplement education savings. The tax protection of Registered Education Savings Plans (RESPs) tops out at $50,000, so participating life insurance is another tool parents can use to top up tax-preferred education savings plans.
Participating insurance for children offers all the stability, tax and investment advantages as does insurance on an adult life. And product options such as guaranteed insurability options or policy loans create flexibility for your child’s future planning.
On its face, purchasing life insurance for a child may seem unusual. But when surveying tax-efficient options to pass down wealth to the next generation, life insurance for children can be a unique gift that can have significant long-term investment and insurance benefits
Life Insurance for Children vs. In-Trust-For Investment (Informal) vs. RESP
Who owns and controls the policy (including the death benefit and cash value)?
Parents can apply for a child’s life insurance policy as its owner and name the child as the insured. The owner can control all aspects of the policy. The policy owner names a beneficiary for the policy’s death benefit, which can be the same as the owner or different. A grandparent policy owner may choose to name the parents as the beneficiaries, for example. Ownership of a policy can be eventually transferred to a child, or named as a contingent owner where policy ownership is transferred to the child at the death of the parent.
What are common options with insurance on children?
A great feature of life insurance on children is that it can provide a guaranteed foundation for your child to add more insurance later in life – no matter how their health status changes. A guaranteed insurability rider (GIR) allows the life insured to purchase additional insurance on specified option dates without providing additional medical evidence of insurability. The additional insurance may be any type of permanent individual life insurance and premiums are based on the same class of risk as the basic policy. Your child may also be able to use the insurance policy as a source of cash – subject to your approval as policy owner. By using policy loans or collateral loans from third party lenders, the insurance policy can function as a quick source of tax-free cash. So, through the insurance policy you’d have a readymade place to access tax-free cash if you want to help your child with university expenses or a down payment on a home.
Will medical underwriting be invasive?
For children, the underwriting process is simple. Usually, only a short medical questionnaire is required.