Insights for
Financial Success

Buying life insurance for your child is about more than just financial protection in the event of an unthinkable situation. A life insurance policy can also be a powerful financial asset to plan for your child’s future. 

In this blog post, we’ll cover a few different reasons why you might consider buying a life insurance policy for your child, and provide some context and information to help you evaluate if this option makes sense for your family.

how child life insurance works

When it comes to life insurance in general, there are two main types:

• Term life insurance: This type of insurance provides coverage for a specific amount of time (for example, 10, 15, 20, or 30 years). When it comes to a policy for a child, it can either be a standalone or an add-on to a parent’s existing term life insurance policy. Because term life insurance is only valid for a certain time period, it tends to be more affordable and predictable in terms of the rate, but it can’t be used as an investment vehicle in the same way as a permanent life insurance plan.

• Permanent life insurance: This option provides coverage that doesn’t expire, no matter how long you live. Permanent life insurance policies also include tax-advantaged cash value features that allow you to treat them as a financial asset – one that is transferable, often tax-free, to your child. However, this flexibility and transferability tends to mean higher premiums and more complexity in terms of rates and structure. 

This blog post mostly focuses on the benefits of permanent life insurance, but if you’d like to discuss the merits of term vs permanent as it applies to your financial situation, we’re happy to help. 

why child life insurance is a smart financial decision

Child life insurance is often overlooked because people tend to think of it only in the context of a child’s death. While life insurance is meant to cover your financial bases should you need to take time off work or pay for funeral expenses, this is a very unlikely scenario to plan around. 

However, most people aren’t aware of the benefits of permanent life insurance policies from a financial planning perspective. As mentioned above, this type of life insurance can grow in value and eventually be transferred to your child as a financial asset when they’re older, meaning they can be used as an investment vehicle to build and transfer wealth to the next generation.

when should you consider buying child life insurance?

As a parent, before taking out a life insurance policy for your child, you’ll typically need to have your own life insurance policy of at least an equivalent value. It’s also recommended to have other financial planning essentials in place for yourself first, such as:

• Health insurance
• Non-registered savings
• RRSPs
• TFSAs
• RESPs

Think of it like putting on your own oxygen mask before helping others. Once you feel secure in your own financial situation, you can start to explore options to set your child up for financial success. Typically, we’ll discuss life insurance with our clients in the context of other long-term investment options, such as a TFSA, RESP, or another investment account opened on a child’s behalf. 

how much does child life insurance cost?

The cost of a life insurance policy is based on:

• The amount of coverage you are buying
• Your child’s age and gender
• Your child’s health and medical conditions (or lack thereof)
• Family medical history

Because insurance premiums are calculated based on statistical probability, the younger (and likely, healthier) your child is, the less expensive it will be to insure them. This is why, in the context of permanent life insurance, locking in a lower rate while your child is young can be a smart financial decision. Policy rates won’t get better as they age, so the earlier you insure them, the cheaper your premiums will be; plus, the cash value of the policy will have more time to accumulate. 

Insuring your child while they are young and healthy also helps guarantee their insurability later on in life, even if they were to develop health conditions that could otherwise make insurability more expensive, difficult, or even impossible. If you get a policy early, your child may be able to switch to an adult policy without needing a medical exam.

Another benefit to taking out a child life insurance policy is that it can be a valuable tool for building financial literacy and discipline: once your child begins their career, they can take over paying for the policy and maintaining their nest egg, so to speak.

the gift of a life insurance policy

The cash value of a life insurance policy can be used towards any of life’s important milestones, whether it’s post-secondary education, a down payment for a home, or even retirement. Starting to build this early on, from when they are young, can be an incredible financial gift for your child. 

Curious how a life insurance policy might compare to other family investment options, such as a TFSA or RESP? Book a free 1:1 discovery session with us today to explore your child’s financial future.