I read an article on July 26, 2014 in the Financial Post by Melissa Leong titled Should You Buy Life Insurance for your Kid? Ms Leong asked the question of three financial services professionals – Chantal Marr, president of LSM Insurance, Ed Rempel, a certified financial planner with Armstrong & Quaile Associates Inc. and Mark Halpern, a certified financial planner, trust and estate practitioner and president of illnessPROTECTION.com – and got three very different answers. I found their responses very interesting for several reasons. Firstly it demonstrated quite clearly that insurance is a very misunderstood product, even among industry professionals. When responding to this question, none of the experts declared what type of life insurance they were referring to. Their answers seem to be about some generic form of life insurance, which no such one size fits all exists. There are several different types of life insurance and each is very different from the other:
- Term Insurance: short term protection for the lowest initial cost.
- Ideal for mortgages but never a child.
- Universal Life or Non Participating Whole Life Insurance: combines permanent life insurance protection with a tax-advantaged investment component.
- Suitable for high net worth business owners or professionals.
- “Participating” Whole Life Insurance: combines tax free compounding cash growth which the child can use for anything they will need in life with permanent fully paid up life insurance that grows in value throughout their life.
Chantal Marr, president of LSM Insurance, declared that she was a big believer in life insurance for children and stated that she had life insurance on each of her three children. Her reason was that “It allows them to have coverage which is locked in at an affordable rate regardless if they have a change in health down the road. This can be particularly advantageous if the child’s parents have health issues that are hereditary”. She went on to say, “The biggest advantage of having life insurance on a child is it gives the parents the time necessary to properly grieve their child’s loss and be there for the surviving family members”.
Although these are good reasons, they only tell part of the story. In her reply Chantal was referring to the insuring the child can have their own life insurance as adults if there are pre existing health issues with the parents or that they may suffer from as young adults that would make them unable to get life insurable as adults. However her comment on parents receiving cash to help them grieve was not referring to a plan that benefits the child but rather the parent. She referred to a “Participating” Life plan she would have mentioned the incredible cash savings the child would have access to in the future to help pay for life’s needs rather than the death benefit to the parent if the child dies.
Ed Rempel, a certified financial planner with Armstrong & Quaile Associates Inc. believes that “Life insurance provides little or no benefit to the child”. In fact he goes on to say, “The dumbest idea is to buy whole life insurance for your child”. These are very interesting comments given that he was likely referring to non participating life which is again to provide insurance coverage for the child’s future but with no cash values of any significance for the child’s future.
Had he referred to “Participating” life insurance. He would have certainly as a professional advisor have said this is a great investment for the child’s future. Given that these plans have been paying annual dividends since the 1800’s and that a child of 1 whose parents deposit only $2,500 per year for 20 years would provide the child with over $76,000 of cash for University and over $600,000 of permanent fully paid up life insurance by age 21. Or that by the time the child is 65 the Participating Life Insurance plan would have over $1 Million in cash and over $2 Million in paid up life insurance for their future family. Or simply that the cash in the plan can be used by the child to fund their education, help buy a house, start a business, as retirement income, as a tax-free transfer of wealth…
Mark Halpern, a certified financial planner, trust and estate practitioner and president of illnessPROTECTION.com said, “Life insurance on children should be discussed as part of a comprehensive tax and estate planning discussion with parents, especially if there is a family medical history of things like cancer, heart problems, colitis, diabetes, etc. because the best time to buy life insurance is when we are young and healthy — qualifying is easier and the premiums are much lower. Other reasons for buying life insurance on children include using it as an education-funding vehicle or for those of higher net worth, as a tax-free transfer of wealth from parents to children or grandchildren”. I assume that he was referring to “Participating” life insurance, and Mark got it just right.
Do you have any questions about whether or not you should or what type of life insurance to buy for your kid? Contact Insurance for Children today for more information.