Invest in Their Future With Life Insurance for Kids
There are many ways to set a child up for the future. While life insurance for kids is a less obvious way to provide opportunity and stability, it plays a vital role in passing wealth from one generation to the next. And like most financial strategies, the sooner you start, the better the payoff.
There are many ways to set a child up for the future. Some are obvious, like setting a good example when it comes to managing money, investing in their financial success at an early age, and encouraging them to understand and appreciate the value of money.
Life insurance for kids is a less obvious way to provide opportunity and stability, but it plays a vital role in passing wealth from one generation to the next. And like most financial strategies, the sooner you start, the better the payoff.
Two ways life insurance is an investment in a kid’s future
Purchasing an affordable whole life insurance policy for a child is a proactive way for parents and grandparents to set kids up for financial success. Here’s how:
1. Lock in coverage later in life
Once a child qualifies for life insurance, they will be covered for life. And if you choose a policy from Serenia Life, you can add the Guaranteed Insurability Option to your child’s policy. This means they can purchase additional life insurance later, without the need for a medical exam.
This is important because the cost of life insurance goes up based on age and any health conditions. By guaranteeing your child or grandchild access to coverage later in life, you’re helping them protect all of the assets and wealth they might accumulate over their lifetime. That’s why it’s never too early to get started.
This strategy typically involves the purchase of a whole life insurance policy in the child’s name with the parents or grandparents named as the beneficiaries (i.e., the individuals and groups who will receive your life insurance benefits). When the child becomes an adult, gets married, or has their first child, the policy can be transferred into their name, and they can select their beneficiaries.
It’s up to the policy owner (i.e., the parent or grandparent) to decide when a child is emotionally and financially ready to accept responsibility for taking over the policy.
2. Lifelong wealth building
Purchasing a form of permanent life insurance, such as whole life coverage, could result in significant wealth accumulation and tax-free benefits for a child. By the time they are old enough to understand the value of life insurance and the power of compound interest, they’ll already be on the road to success.
Let’s take a closer look at this strategy and how purchasing whole life insurance for kids can lead to life-changing financial security.
Whole life insurance for kids
Whole life insurance belongs to a broader category of coverage called “Permanent Life.” It means that once a policyholder has made all of the payments, typically over a 15- to 20-year period, the policy is permanently in place and can never expire.
But there’s another component to permanent life insurance that makes it attractive as a multigenerational planning tool. A portion of each policy payment is set aside in an investment account that grows on its own without any additional contributions from you. This investment pool is known as the “cash value¹” of a permanent life insurance policy, and as it grows, it can be used to help fund all kinds of financial priorities.
For example, decades from now, a child who was given the financial advantage of a whole life insurance policy may have enough cash in the policy to pay for something like a down payment on a first home. Years later, they may withdraw more money to help pay for their children’s education.
Getting money out of a whole life insurance policy
A Serenia Life advisor can help you determine the best way to withdraw the money from the cash value of a whole life insurance policy. Depending on how much you need, your advisor will likely recommend one of the following options.
Option 1. Give yourself a policy loan²
Taking money out of the cash portion of your policy is essentially giving yourself a loan that you are under no obligation to repay. When you die, the insurance company will simply deduct any money owing — plus interest — from the death benefit (i.e., a payment made to designated family members or other loved ones after you die).
Option 2. Make a cash withdrawal³
You can withdraw money from the cash portion of a permanent life insurance policy at any time and use it as you see fit. If you do, the final payout your loved ones receive may be reduced.
How much coverage do you need?
How much coverage you purchase is a personal choice and it should be based on your short- and long-term goals and your current financial situation. The cost should also be balanced with other steps you’re taking to provide for a more secure future. For example, you may also be contributing to a RESP for your child and could be paying into income replacement strategies for yourself, such as critical illness insurance and disability insurance.
While the investment portion of a whole life policy should always complement an RESP, it’s a good idea to chat with your advisor to see if you are contributing more than necessary to maximize the government benefit. In that case, you could shift some of that money over to your child’s whole life policy and get the best bang for your buck.
The following table demonstrates just how affordable it can be the younger you insure a child. These numbers are for a 20-pay whole life policy for a 5-month-old baby girl.
| Coverage Amount | Monthly Payment |
|---|---|
| $25,000 | $31.28 |
| $50,000 | $56.26 |
| $100,000 | $100.80 |
| $500,000 | $454.50 |
Illustration only, as of December 3, 2024. Age 0 based on female regular rates, paid up additions dividend option, and using current dividend scale.
Why insure a baby?
It’s a common assumption that babies don’t need life insurance because they don’t earn an income. Indeed, they are not little money-makers but it’s not their income you’re replacing – it’s yours.
Another commonly held belief is that child insurance policies are a poor investment over the long term. However, life insurance is not just about money. It’s also about creating a wider range of financial options and opportunities for your children decades from now, such as guaranteed access to the cash value, coverage and the right to buy more as needed regardless of health or lifestyle concerns in the event you selected Serenia Life’s Guaranteed Insurability Option at the time of purchase.
Let’s take a look at the potential for growth if you were to purchase that 20-pay whole life policy for a 5-month-old girl we mentioned above? In the table below, you can see how much money that baby would have access to at different stages of her life, depending on which coverage amount you invested in when she was a newborn. As you can see, the money available to her can range from modest or life-changing.
Whatever the case, she’ll appreciate having access to funds – whether it’s a few thousand dollars in her 20s or in the millions as she nears retirement.
| Coverage Amount | Total Cash Value at Age 20 | Total Cash Value at Age 35 | Total Cash Value at Age 65 |
|---|---|---|---|
| $25,000 | $6,887 | $17,522 | $95,280 |
| $50,000 | $13,775 | $35,045 | $190,560 |
| $100,000 | $27,550 | $70,090 | $381,119 |
| $500,000 | $137,748 | $350,448 | $1,905,596 |
Illustration only, as of December 3, 2024. Age 0 based on female regular rates, paid up additions dividend option, and using current dividend scale. Future performance will be different than illustrated due to the variability of the dividend. All numbers in CDN $. Current monthly premium varies based on the specified coverage amount payable in 20 years. The policy is “paid up” at Age 20.
Let’s find the right answer for you
Buying life insurance is one of the things parents do to protect the entire family. Purchasing the right combination of policies and balancing the costs with all of your other financial priorities is a juggling act that’s easier to perform with the help of a Serenia Life advisor. We’re here to help you put your kids or grandkids on the road to long-term financial success.
Be sure to ask about our Bundles of Joy Benefit – a $100 baby bonus when you buy a life insurance policy for a child before the age of one.
Frequently Asked Questions
Can a life insurance policy be used for educational expenses?
The simple answer is yes. If you purchase a participating whole life insurance policy for a child when they are a baby, for example, the investment component of the policy has approximately 18 years to grow. By the time, the child is ready to begin their post-secondary education, their policy will have accumulated enough money to help cover this expense – which they will have access to as a policy loan or withdrawal.
What happens to the policy as my child grows older?
As your child grows older, the investment component (or cash value) will continue to grow. Once they reach legal age, they can access this money to help pay for expenses, like education, a wedding, or even a down payment on a home. Beginning at age 18, you can transfer ownership of the policy over to your child, who would then take on the payments (if applicable) and update the beneficiaries to their own child or spouse.
Can the policy be transferred to the child when they grow older?
Yes, the policy can be transferred to the child once they reach age of adulthood (anytime after the age of majority in their province). If applicable, joint ownership is also an option. As the policyowner, you would need to complete a change of ownership form in order to transfer ownership. Once ownership has been transferred, your child can designate their own beneficiaries.
How do I involve my child in understanding the importance of life insurance?
Start by prioritizing financial literacy in general – by talking to your children about money and modelling positive money management behaviours. As they get older, provide them with opportunities to save and spend their own money by giving them an allowance and helping them learn the value of a dollar. Juvenile members of Serenia Life can receive a free financial literacy book for kids, A Wise Kid’s Guide to Money Matters, which includes a section that speaks to the importance of life insurance for children.
How do I choose the right insurance provider for my kid(s)?
It’s important to do your research and take the time to compare insurance providers. Consider things like cost, benefits, the provider’s credibility, and whether or not you share an organization’s values – if something like that is important to you. If you are looking for an organization that can help support your family, consider a members-based organization – where you and your child are treated like “members,” rather than customers. Of course, do not overlook the importance of customer reviews, as you may get a better sense of the pros and cons of working with specific insurance providers.
Disclaimers
1Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
2Policy loan is an easy way to access the accumulated cash value of the policy. A variable interest is charged on the amount borrowed. This may result in taxable consequences. Loan can be repaid at any time. Upon death and the loan is unpaid, the outstanding balance including any accumulated interest will be deducted from the total death benefit, with the remainder paid tax free to the beneficiary(ies). In the event the policy loan exceeds the cash value of the policy, the policy will lapse.
3Policy withdrawal is an option to withdraw money from the accumulated cash value of the policy if Paid-up Additions or Accumulated Dividends is the selected dividend option. Withdrawals reduce the total cash value, affects future growth, and reduces the death benefit. If the withdrawal is only up to the amount that is paid in premiums (known as the adjusted cost basis), there won’t be taxes. Otherwise, there would be taxes on the portion that is more than the adjusted cost basis.
