When it comes to getting life insurance, one commonly dispensed piece of advice is that it’s better to get coverage at a younger age. Not as common, however, is the suggestion for adults and seniors to buy a life insurance policy on their children or grandchildren – even though it offers many potential benefits.
“The rate you pay is based on juvenile rates.” said Peter Wouters, director, Tax, Retirement & Estate Planning Services at Empire Life. “They’re not gender-specific, there’s no smoker or non-smoker rate; this is one specific set of rates for juveniles typically from 0-17 years of age.”
According to Wouters, those who maintain their policies past the age of majority can lock in those low rates through to adulthood. That means even in their later years, a policy set up for an eligible child – which includes natural-born children, stepchildren, and children by adoption – and maintained into their adult years would still have the same cost of coverage as when the policy was bought for them.
Juvenile life policies can come with coverage as low as $10,000 for a child, though that amount can be higher – between 50% and 100% of the coverage that their parents have in place. Getting that coverage is generally not difficult, Wouters said, with only a few questions needing to be answered for a fully underwritten policy to be put in place. And with a ‘guaranteed insurability’ option, the child will have the chance to purchase extra amounts of coverage when they grow up at standard rates without any evidence of insurability. The upshot is that even if something happens to them down the road like an injury or disease, they can get extra amounts of coverage with no questions asked.
“Buying coverage at a younger age may minimize the downside of what I’d call adverse underwriting decisions based on family history,” Wouters said. The younger a child is when they apply for a policy, the lower the chance of their parents having developed an unfavourable record of health issues. And with nine out of 10 Canadians having at least one risk factor for a heart condition, or vascular cognitive impairment – that’s according to a 2019 report from the Heart and Stroke Foundation of Canada, he said – it’s likely that a clean bill of health won’t stay clean forever.
The same reasoning applies to the child as well. As children get older, they may develop conditions that would affect their insurability. Lifestyle factors may also come into play, notably if they adopt social or personal habits that can limit their ability to get coverage. And should the unimaginable happen and the child were to predecease their parents, the family could benefit from having life insurance in place to cover medical costs, final expenses, and income lost from taking time to grieve.
Another benefit, according to Wouters, comes from the flexibility one can get from accessing the cash value of a permanent participating life insurance policy. Many parents might consider setting up a registered educational savings plan as they envision their children pursuing a post-secondary education. If they have a participating whole life policy, they can use the cash value to go down other paths, like going to school much later in life or forgoing higher education altogether in favour of some other future path.
“Those with policies that have high cash value components can use it to take some heat off when they need money,” he said. “They can go right to the insurance company and explain that they need to borrow some money, withdraw some money, or use their policy as leverage to get some money. All those avenues are there for them to access easily and quickly.”
The cash value for life insurance with permanent coverage, Wouters added, undergoes tax-sheltered growth. From a financial- and tax-planning perspective, that could be desirable for Canadians who want to either accumulate money for themselves or are trying to set up an appreciating asset as a future gift to their children or grandchildren.
Of course, that can conceivably be done through RRSPs, TFSAs, and possibly a workplace pension plan, but contribution limits put a ceiling on that approach. And adults may seek tax-sheltered growth through a permanent life policy of their own, but they’re less ideal when one considers the decidedly lower cost of insuring a child.
“They can benefit from it as long as they want to own the policy, and pass whatever remains on to their kids or grandkids when they’re good and ready,” he said. “It doesn’t have to go through the estate; it doesn’t have to go through probate. There’s no tax triggered with it. It’s as simple as naming their children or grandchildren as successor owners to the policy, and ownership is transferred – no need for wills, trusts, or anything fancy, and it’s all provided for under the Income Tax Act.”
So what should Canadians consider as they look to insure their child or grandchildren? The list of considerations is an extensive one, starting with the fact that the loss of a parent has far worse repercussions for the surviving family compared to the loss of a child. That means parents must first consider whether their own requirement for coverage have been met. If that’s the case, they must ask if paying for their child’s coverage on an ongoing basis would cause them to compromise their own needs.
Beyond that is a host of product features that clients must navigate as they think about their needs or purposes. Those who want tax-sheltered growth for their money should pay attention to the rate at which the cash value grows over time, or any limits placed on when they can access the money. Customers who don’t want to be paying for a policy forever may also be interested in a guaranteed limited payment period, which would allow them to pay for the coverage in full within eight years, 10 years, or some other defined amount of time. In the context of COVID-19, finding a company that offers a quick online application process is a definite plus.
“Then look for policies where the premiums are guaranteed and some or all of the cash values are also guaranteed,” Wouters said. “And in many cases, it’s good to consider companies with policies that allow parents to put in extra money if they want, but not be tied to that. So they can speed up payments or accumulate cash when they get a windfall, but also take a break when times are lean.”