19/12/2024
If you’re considering life insurance for your children, you should be aware of the various options available, and their pros and cons.
There’s two reasons that Canadians put life insurance on their children, and a third more practical reason.
Canadians will often purchase life insurance for their children as a financial gift. It’s a way of telling them that you love them, you’re teaching them financial responsibility, and providing a useful financial tool for their future. Some argue against this type of application, suggesting it’s not financially optimal – but that’s a simplistic and incorrect argument. In practice, we can each choose the value of the items that we purchase, and if a gift of life insurance is how you choose to spend your money that’s fine. By contrast, a life insurance policy is arguably better than yet another XBOX as a gift.
The second reason it’s purchased is to guarantee future insurability. By purchasing insurance today, we guarantee that the insurance is there for the future, even if the child later becomes uninsurable.
The last reason is more directly financial – it’s loss of income. If you read enough articles about life insurance on kids, the counterpoint is that ‘kids don’t have an income’ and therefore they’re not financially insurable. In practice however, and from a strictly financial perspective, you’re not insuring your children’s income – you’re insuring your own income. In the event of the loss of a child, extended leaves of abscence for the parents is very common – sometimes years. The life insurance on children can be viewed as income replacement for the parent.
In terms of coverage amounts, there’s no specific calculator. Coverage amounts of $100,000 are common, so that’s as good a number as any to start with. If budget is a concern, you may consider reducing to $50,000. If budget is less of a concern, you might look at $250,000 to ensure that if they do become uninsurable they have at least enough to provide for their family for a short period of time ($250,000 of coverage is much less common on children).
There are three ways to get life insurance on children, and the best type varies with your goals and budget.
First, and the least expensive, is as a rider (called Children’s Protection Rider, or CPR) on your life insurance. CPR is only available at the time that you get your policy, it can’t be added on later. CPR varies a bit by company, but premiums are generally in the range of $10-$15/month for $10-$50,000 of coverage. The coverage lasts until they’re adults, at which point they have the option of exchanging to an individual policy at some multiple of the CPR coverage – but at smoking premiums. So the exchange is generally not an attractive option at that time unless the child has become uninsurable. CPR is best suited if you want a small amount of inexpensive insurance on your kids until they’re adults.
Term 100 life insurance has guaranteed level premiums for life and guaranteed level coverage for life. In terms of permanent, lifetime life insurance it’s the lowest premium option. The drawback with Term to 100 is that coverage is fixed level for life with no increases. Over long periods of time inflation becomes a concern so this policy type isn’t suitable if you’re concerned about increasing the coverage over time to keep pace with inflation.
“Par’ whole life is the most common type of life insurance placed on children because it provides lifetime coverage and increases in coverage to combat inflation.
Par Whole Life has a base guaranteed level of coverage. Each year the life insurance company provides non-guaranteed increases in the coverage based on their experience. Those increases are roughly in line with inflation.
Par whole life can also be obtained as a ‘20 pay’. With this policy type, the premiums instead of being spread out over their lifetime, are compressed into 20 years. So, higher premiums for 20 years, then $0 for the rest of the child’s life. This format is generally chosen to allow gifting of the policy to the child when their older, with no further premiums due.
I’ll wrap up this article with one small warning. I recommend not transferring ownership of life insurance to your children until they value the insurance coverage more than the value of any cash surrender values or the cost of the premiums. If you gift a life insurance policy to a 20 year old that has a $5000 cash surrender value, often the $5000 looks better as beer than as life insurance. The policy gets cancelled, the $5000 spent, and then they regret the loss of insurance when they’re 40. So keep the insurance in your control until they’re at a point in life where they value life insurance more than beer.
If you have any questions about your life insurance coverages, please contact The Term Guy at (416) 642-6820.