Should you get insurance for your child?There are always great debates on whether you should get life insurance for your child when they are still young. I recently read a column from another advisor, where he is completely against this idea. As a result, this column received many critics such that it is overly biased since the pros and cons are not well presented. His logic is that if the child is not generating income now, there is no income replacement needs. I do agree with this point, in most of the time, getting life insurance for a child does not bring immediate benefits. However, the idea is to prepare for their future. Unless you foresee that your child would always be independent, he/she would grow up and start a family. Then they will definitely have their insurance needs. At that time, it’s not hard to imagine, your child would have lots of expense to be taken care of. For example, mortgage, car payments, utilities, debt payments, phone and cables, groceries, and many others. Wouldn’t it be nice if they have a life insurance policy that is already been paid up?Before we start, I would like to make a clear statement that in the financial practice, “ONE SIZE DOESN’T FIT ALL”. Everyone’s situation is different, the income is different, the family condition is different, the goals and priorities could be different as well.Let’s go back to the original discussion, what are the pros and cons in getting child life insurance?What are the pros of insuring your child?Reduce the uninsurable risk:
Insurance is unlike other products, where you can buy it anytime you want. In order to get approved, it has to gone through detailed underwriting process. Getting the policy setup early will protect the child’s ability to obtain coverage against future health problems, such as asthma or cancer; it will also protect the child against risky occupations such as becoming a firefighter or pilot.Many parents assume that because their child is healthy now, then they will be healthy in the future. I have personally encountered a young client around age 25, where the life insurance policy was rated 50% due to medical problem. If the parents got a policy when this client was small, this would not be a problem, since the policy could be paid up by now.Family history also plays a role in the underwriting process. Your future health condition might affect your child’s ability to purchase insurance in the future. This is one of the questions from the life insurance application of Canada Life, which is a very common one across the insurance industry: “Prior to age 65, did any of your parents, brothers or sisters: a) have cardiovascular disease, stroke, diabetes, Huntington’s chorea, polycystic kidney disease, or any other hereditary disorder? b) have cancer/ tumour? c) die from any of the conditions mentioned in 13.10 a) or b) The earlier you get the policy, the lower the premium cost:Life insurance premium charges more as your child gets older. If you setup the policy at their young age, it would be a lot more affordable than when they grow up. Furthermore, the premium of limited-pay permanent insurance has been raising a lot in the past few years. You’ll be paying less if you get your contract before the next increase. Note: “Limited-pay policy is where you only pay premium for a pre-set period of time, but the coverage would last the insured’s lifetime”Growth in coverage and cash valueOne of the options parents could consider for their child is whole life par insurance. The key characteristics are the policy has cash value that would grow overtime and it has the potential to pay out dividend. From the dividends, you may choose to use these dividends to purchase more insurance for your child. This strategy is called “paid-up addition”. If you are concerned that coverage would be eaten up by inflation, the paid up addition could be a great tool to grow your child’s coverage overtime.Permanent policies can also provide the child’s future added financial flexibility – the cash value can be used towards a down payment on a new home or as collateral for a loan for other purpose. However, it takes time for the cash value to grow, do not expect there will be significant cash value in the initial years.What are the cons of child insurance?I would say in the economic perspective, it’s really the opportunity cost. If you do not get life insurance for your child, what other ways will you use those money?
– Savings into RRSP? RESP? TFSA?
– Pay down mortgage? Credit cards? Personal loans?
– Other debts?
– Renovate your house? Go for vocations?
– Others purpose?In conclusion, there’s really no single right or wrong answer in whether you should be getting life insurance for your child. It really depends on your personal priorities. However, one rule of thumb is before you get child life insurance, you should always insure yourself first. After all, we are the one that the child is depended on.Disclaimer:This article is for general information only and is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please consult an appropriate professional regarding your particular circumstances. This article does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such offer or solicitation. References in this article to third party goods or services should not be regarded as an endorsement of these goods or services.This article is intended for Ontario, Canadian residents only and the information contained herein is subject to change without notice. The owner of this article is not liable for any inaccuracies in the information provided.