October 20, 2022

Considering Children’s Life Insurance

What is Life Insurance for Children? 

Purchasing a life insurance policy for your child or grandchild has many benefits. Whole life insurance for children is especially beneficial, ensuring future insurability for your child, regardless of health issues. A whole life insurance policy also offers an effective way to build wealth, providing lifelong coverage and the potential for dividend payments or a cash value to access later in life. 

How does it work? 

Whole life is the most common form of insurance used for children’s policies. 

Children’s insurance is guaranteed to remain in force for the covered child’s entire lifetime (including into adulthood) and can generate dividends during this whole period. Of course, this is contingent on the policyholder continuing to pay the insurance premiums – for the length of the policy or to its maturity date or until the set premium paying period such as 10 or 20 years. This provides your child with both lifelong insurance coverage, even if they become uninsurable later in life, they will always have this policy and a great start on their financial savings goals. 

Whole life insurance accrues a cash value which the policyholder can withdraw from – like a savings account there can be restrictions on this so please work with an advisor– or use as collateral for a loan from a financial institution. 

Pros and Cons  

Pros  

  • Buying life insurance for your child guarantees insurability. Even if your child develops a serious health condition later in life, they will still have coverage. Furthermore, if your child partakes in dangerous hobbies that limit available insurance, they still have coverage. 
  • Buying life insurance for your child allows you to lock in cheap premiums compared to getting premiums later in life.  
  • It provides financial peace of mind if your child were to die. No one likes to think about their child passing away, but if tragedy ever struck, a child’s insurance policy would allow the parents to take time to grieve and not worry about losing income from taking time off work. 

Cons 

  • A whole life insurance policy on a child is a long-term commitment. When purchasing a policy, the premiums are often paid for decades. It may not be worthwhile if your cashflow is tight.  
  • There is an opportunity cost of a child life insurance policy. It is very unlikely that your child will pass away at a young age, so money spent on premium may be better spent elsewhere. 
  • Returns are often lower. Life insurance policies will build up a cash value, however due to the conservative nature of the way insurance companies invest, the rate of return with the policy may be lower than the long-term return of the stock market.  

Case study  

Tom and Joanne recently welcomed Sarah, their new granddaughter, to the family. Tom and Joanne want to gift Sarah with a whole life insurance policy. The policy they choose has annual premiums of $500 per year with an initial coverage of $ 50,000, as well as a “paid-up” additions clause. They plan to pay the premiums for the first 18 years of Sarah’s life, and the transfer the policy over to her. Fast forward to when Sarah is 18, she now has a $ 20,000 total cash surrender value that can assist her with her first down payment. Thanks to the “paid-up” dividends, her new coverage is now $ 80,000, and is expected to continue to increase throughout her entire life. These numbers are only an illustrative example of how whole life child insurance can work. There are many different types of policies and numbers can vary greatly. 

Having the appropriate amount and types of insurance is important to ensure your family is protected financially. Northfront Financial has a specialized insurance advisor who can help you determine if childrens’ life insurance is right for your and your family. 

About Northfront Financial

Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and Certified Financial Planner™ (CFP™) designations.

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