Protecting the lives of your family, for the lifetime of your family
There is nothing more devastating to a parent than to have a son or daughter predecease them. We expect to raise our children to go out into the world, so witnessing their departure from it prematurely is not something a parent expects to be dealing with. It’s called a death out-of-order for good reason, as it does not fit the natural order of things.
Even so, the suggestion to obtain life insurance on a child can be unsettling to a parent. After all, the primary purpose of insurance is to replace lost income. The child doesn’t support the family; the parent does. To some, insuring a child may seem like a gamble for a payout upon a tragic and unlikely event.
However, the reality is that a child’s death can have significant consequences for the entire family. Insurance can provide the time, space and resources for people to heal. And in the more likely scenario where misfortune does not occur, it can then be a valuable tool to give your children a financial head start in life.
Financial cushion for recovery
Beyond the initial shock and expense of dealing with the loss, parents will need time to grieve. While many employers provide bereavement leave, it may not be enough for many parents to adequately recover.
With insurance acting as an income bridge, parents could choose to spend more time away from work until they are truly ready to return. Or for parents who run their own business, insurance could be used to sustain operations in their absence, for example to fund employee overtime, hire temporary staff or otherwise provide a cash infusion while activity slows.
And while this extended time is a welcome reprieve, it does not in fact heal all wounds.
Both parents and siblings of the departed child will have their own ways of coping. Some may be comfortable leaning on one another or confiding in friends, while others may need more. Insurance can help with the cost of professional counselling, allowing each family member to take whatever time they need and to use whatever process suits them best.
Types of insurance to choose from
Once a parent sees how insurance can help them manage such traumatic circumstances, the next consideration is whether to use a term or permanent policy. Term insurance is intended to last for a specified number of years, whereas permanent insurance is expected to be held for life. In either case, the insurer’s premium cost is based largely on the low risk of death of a young child, which in turn helps make it affordable for parents.
Generally, the least expensive option is for a parent to add a child term rider when they purchase their own insurance policy. Most insurers offer this coverage on a child up to a certain age, usually 25, at which time it is normally then convertible into permanent coverage.
Alternatively, the parents could choose permanent coverage right away, commonly a term-to-100 or whole life policy. Of the two, term-to-100 is lower cost, but whole life is often preferred as it can generate annual dividends that build its cash surrender value over the years. What’s more, that growth is tax-sheltered.
Tax-sheltered savings for education and more
Far and away, the greater likelihood is that a child progresses through their youth to become a thriving young adult. In that case, parents may wonder whether those past insurance premiums are a lost cost. The answer is that the financial cushion discussed above is only part of the case to be made for obtaining the insurance.
Built on that foundation, insurance can be an effective tool for a child’s own future financial needs. A familiar strategy is to use the tax-sheltered cash surrender value of a whole life policy to complement a Registered Education Savings Plan (RESP) for post-secondary education.
As policyholder, a parent could withdraw part of the cash value, arrange a policy loan with the insurer, or pledge the policy as collateral for a loan from a separate lender. An appealing part of the withdrawal option is that there is no interest charge in comparison to the loan options. On the other hand, if a large withdrawal is taken, it may be partially taxable. Even here though, there is a way to get some relief.
An income tax rule allows a parent to transfer a policy on a child’s life to that child on a tax-free basis. If the child then makes a withdrawal while over age 18, it is the child who will bear the tax, if any. Assuming that the child is a student with minimal income at the time, it is likely that there will be little or no tax to pay. It is also worth noting that money coming out of an insurance policy may be used for any purpose, not just for education.
For a child’s own future family
As children move further into adulthood, they will take on greater responsibilities, including having their own families. Like their parents, these new adults will have financial obligations to those families.
Insurance established in those early years and transferred to the child can now be used as a safety net for the new family. Of course, the amount of coverage needed will be larger than the original amount on the policy, so additional coverage may be sought.
But what if the son or daughter becomes disabled through an accident or develops a severe medical condition? How would that affect the policy? Fortunately, the insurance established in those early years may continue, even if there is a later diagnosis that makes the person uninsurable thereafter. As well, many insurers offer a guaranteed insurability rider to their policies, allowing future increases in the amount of insurance (within limits) without having to prove medical eligibility.
As these examples show, life insurance is not merely on a child’s life, but can be for a child’s life. It is a way for parents to preserve and pass on family values, both in financial sense and in sharing their beliefs.