Planning ahead for you and your family is important as a new family or expecting parents, and life insurance is a highly beneficial financial planning tool to include in your plans. One common way to protect your family with insurance is to get coverage specifically for your child, and not just for yourself and your spouse. Although you may have seen or been introduced to some options, fully understanding your options for life insurance for your children is crucial.
What is child life insurance?
A general term used to describe life insurance policies where the insured is a child is “children’s life insurance.” Children’s life insurance is a life insurance policy or rider purchased for a minor by their parent or grandparent (who will act as the policyholder).
The insurance is in effect for the duration of the covered child’s life (even into adulthood) and can yield dividends during this time (as long as the policyholder keeps up with premiums). This gives the insured child lifelong insurance protection in addition to a head start on their financial objectives and savings, should they choose to access the cash value.
By purchasing permanent life insurance for your child, you provide them access to a wider range of alternatives and can help them pay for their first vehicle, home, or education.
If you are a parent or grandparent, purchasing life insurance for the children in your care can give them lifetime financial security. It also offers you additional financial support in the event that they pass away before you, though it is typically not the major justification for getting a policy for kids.
How does life insurance work for a child?
If you want to buy life insurance for your child, you have two main choices: adding them as a rider on your own policy, or getting them their own policy. Each will offer various benefits and levels of coverage, but they both function similarly in that they protect your child by paying out benefits to the beneficiary in the event of the unthinkable.
Children’s life insurance is a useful financial tool that can be used to invest in college costs, lock in low premiums for your child, safeguard your child’s insurability, and/or pay for funeral costs in the event that your child passes away.
What is the purpose of life insurance for kids?
Although most people assume that only adults need life insurance, parents should actually get it for their children for a number of reasons.
When you buy life insurance for your child, you are effectively building a financial safety net. Your designated beneficiary would get the payment from the life insurance policy in the event that something unfortunate happened to your child. The recipient may use this sum of money to help with living expenses or to pay off any debts your child may have, including burial fees. If you choose to buy them their own permanent life insurance policy, you can build cash value that your child can take out and pay for future financial obligations.
Why child life insurance?
Aside from financially preparing for an untimely death, insurance can also help children be protected and secure with their health and finances throughout their long lives.
If you lock them into a policy today, they may be able to convert it into a policy as an adult without having to undergo a medical exam. Because of this feature, their premiums will probably be lower than if they had applied on their own because the premiums will likely be based on their healthier, younger selves. This can depend on the insurance provider, so it’s best to ask an insurance advisor if you’re not sure.
What are the advantages and disadvantages of children’s life insurance?
As with all types of insurance, they will have their own pros and cons.
The obvious advantage of having a policy for a child is that it can help alleviate any costs associated with the unfortunate event through the death benefit. This can include funeral expenses, taking time to grieve, or private counseling.
Other advantages of children’s life insurance that the covered child can provide are:
- Life-long coverage for the insured child. This can prove incredibly helpful if a child is diagnosed with any critical illness or health conditions that may impact their insurability down the road.
- Children’s life insurance policies generally offer lower premiums due to the young age and relative health of the insured child
- Children’s life insurance can also be used as a savings vehicle as mentioned above, or as a more flexible alternative to a Registered Education Savings Plan (RESP).
There are some downsides associated with children’s life insurance as well, although they don’t apply to every situation. Some of the common cons would be:
- Children’s life insurance policies offer a lower rate of return compared to other investment options. The cash value component of children’s life insurance won’t beat a dedicated investment vehicle.
- It’s a long-term commitment. For children’s insurance to make sense as both protection and investment, the policyholder needs to consistently pay the policy premiums for the required payment period. If one lapses on payments, many of the benefits (like guaranteed future insurability) will be in jeopardy.
Children’s life insurance has the potential to be a great gift for your child or grandchild should you choose to apply for a policy. Providing both future insurability and a financial asset can give them a head-start on their path to adulthood. Educating yourself about the policy’s possibilities and limitations can help you decide on the best coverage for your loved ones.
How do I buy life insurance for my child?
There are two ways to get life insurance for your children: a term rider on your own policy, or purchasing them their own policy. Term riders are generally less expensive but provide significantly less coverage, whereas permanent life insurance for children provides greater options for coverage and future insurance eligibility.
- Child Term Riders (CTR): If you already have your own life insurance, one of the cheapest ways to get insurance for your children is with a CTR. These riders typically offer guaranteed insurability up to a certain age, usually 21–25, which your new-into-adulthood child can purchase their own life insurance policy without needing a medical exam.
- Stand Alone Term Renewable Coverage: This is a child’s own term life insurance policy, and can be renewed at predetermined intervals without supplying additional medical evidence. Before these policies expire, you can convert them to permanent life policies.
- Permanent insurance (whole life or universal life): This is the most expensive solution with the most comprehensive coverage. It pays out regardless of when the insured passes away, but the premiums are much higher. There is an investment option available sometimes, but don’t consider it over a TFSA or RRSP for investing. Unless you’re a very high net worth individual, whole or universal life insurance for children is probably not the right option.
Child Term Riders (CTR)
If you have an existing life insurance policy with an insurance company, most insurers will offer you a child term rider to cover your children. A child term rider, also known as ‘children’s term rider’ or ‘child rider’, is perhaps the least expensive way of buying life insurance for young children. It pays out a death benefit of up to $30,000 if one of your insured children passes away while your policy is in force.
Typically, these riders offer guaranteed insurability up to a certain age. They may cover your children until they reach the age of 21 to 25, and can help your children get a life insurance policy of their own.
Stand Alone Term Renewable Coverage
This is a term life policy you can buy specifically for your child. As it’s a renewable term policy, the coverage expires at the end of a set number of years, but can be renewed without a medical exam. You also have the option to convert the policy into a permanent one before it expires.
Permanent Insurance for Children
Permanent life insurance (namely whole or universal life insurance policies) for children offers comprehensive coverage, but it is more expensive than term life. Because it will cover your child for life, it will pay the death benefit regardless of when the insured dies.
In addition to providing lifelong life insurance coverage, these life insurance policies often include an investment option. However, you may want to consider investing in your TFSA or RRSP before getting a policy. This is because whole life insurance policies generally have a lower rate of return and higher fees in comparison to a traditional investment vehicle.
To summarize the difference: a child rider provides a death benefit if any of your children pass away without the complex investing component, and can be converted to a permanent policy in the future if your child needs lifelong coverage. A child rider is more affordable than a full child life insurance policy. It usually costs about $5 per year for every $1,000 worth of coverage. So, you might pay $50 more per year for a $10,000 child rider.
How much life insurance can a child get?
The amount of life insurance a child can get depends on the type and the policy you choose. Generally, if you choose to cover a child with a term rider, you’ll have coverage available in increments of $5,000 up to $25,000 or $30,000.
What is the best children’s life insurance policy?
Most of Canada’s best insurance companies have options for child term riders, and many of Canada’s major insurers offer whole life insurance for children, including Equitable Life of Canada, Empire Life of Canada, Assumption Life, and Industrial Alliance.
Personal preference, specific needs (like riders and options), and more can affect what would be the best children’s life insurance policy for families like yours, whether it be a term rider or a permanent policy.
To explore these policies in detail and learn more about how children’s life insurance works, it’s important to talk to a life insurance expert or advisor. Here at Protect Your Wealth, we help Canadians protect their family’s financial future and steer them towards coverage that’s right for them. Whether you are wondering about children’s insurance or other policies like universal life insurance, we can help.
Frequently Asked Questions (FAQs) about Life Insurance for Children
Permanent life insurance for children isn’t a smart investment unless you’ve maxed out your other investment options. The cash value earns interest at a rate set by your provider, often with a guaranteed minimum. However, whole life has higher fees and less growth than you’d get from a standalone investment account. This means the rate of return is much lower with a children’s life insurance than a regular permanent life policy. Purchasing a child rider or stand alone term for your child is typically a better option, depending on your circumstances.
Some insurance companies offer policies that take effect as soon as a child is 15 days old. When starting this early, there’s the benefit of having more years to collect dividends on a participating permanent policy. Also note that prices and premiums generally go up with age.
A $50,000 stand-alone permanent policy for a child typically costs $50 per month, while a child rider for term life insurance might cost $5 or less per month for the same coverage amount. As coverage amounts and age increase, so do premiums.
Finding the protection you need for you and your family
If you still have questions about your life insurance options for you and your children, get in touch with us today! Working with a life insurance advisor can help you build the right life insurance plan and package for your needs, or explain your current coverage and protection.
At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package to give you the protection you need.
Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, Alberta, and British Columbia including areas such as Ancaster, Prince George, and Red Deer.