I have been getting requests from parents and grandparents to insure their children/grand-children since
I started in the life insurance business in 2005. These request have become more often in recent years. Grand parents want to leave something to their grand children, parents want to save in smart ways for their children.
To illustrate the most common scenario in which a parent can advantageously invest in life insurance for their child, I’ll provide here the details of one of my most recent cases.
Parent’s situation
Chloe is a single mother with above average income. She is maxing out the RESP of her newborn daughter Kaleigh. Chloe is also contributing $200/month to a TFSA designated for Kaleigh. When she contacted me, she wanted to put not more than $150/month into a life insurance to diversify the investments for her daughter.
Summary
Life insurance cost: 1,650 for 20 years, or a total of $33,000
Available cash surrender values in the policy when Kaleigh is
- 35 years old: $75,500
- 45 years old: $140,800
- 55 years old: $254,500
- 65 years old: $447,800
Total death benefit when Kaleigh is 90 years old: $1,610,000
Why using life insurance to save for a child?
Tax-sheltered savings growth
Savings grow protected from taxation in a regular RESP account and if you use your own TFSA but have the account ear-marked for your child. Beyond these two types of accounts, there is no other ways to invest for your child on a tax-deferred basis except for life insurance.
Diversification
Investing in an RESP and a TFSA is most often done through the use of investment funds (mutual funds, segregated funds, ETF-s) or stocks and bonds.
Using a Whole Life insurance product allows you to benefit from the cash values growth in the policy that is not directly correlated to the stock market. Hence the diversification. I will explain how the Whole Life insurance product works a bit later in the article.
Overall portfolio risk reduction
The growth of the cash values of a Whole Life product depends on the dividends paid to the policy. Historically, the dividends the major Canadian insurers pay have had lower than the Government of Canada 10-year bond standard deviation (a measure of risk) and up to 15 times lower standard deviation than the S&P/TSX total return.
Protection against negative returns
An RESP account or a TFSA that uses investment funds can and most probably will experience negative returns when the stock market goes through a correction. The cash values of the Whole Life product cannot go down unless there is a withdrawal.
Guaranteed minimum growth
I personally have never heard a case when an insurer would not pay dividends to a participating Whole Life contract. But even if that happens, the Whole Life insurance contracts come with guaranteed cash values that increase over time.
Zero account management
With an investment account, you need to take some investment decisions on a regular basis. With the Whole Life insurance contract, there are no investments to manage. The growth in the contract is a result of the profit of the insurer distributed back to the policy in the form of dividends.
