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Why do people insure their children and grandchildren, and does it make sense? First of all, you are not getting insurance on them, you are getting insurance FOR them! We believe that life insurance is a WANT, not an absolute need, and there are several reasons why a lot of people – who have done their due diligence – WANT to get life insurance for their children. Actually, we’ve received more requests recently from people who want to set up life insurance policies on their children! Why? There are many reasons – we give you five below. (Often, the biggest reason is the first.)
The younger the insured is, the lower the cost of insurance is within the policy. You are locking in the low premiums for their entire life, because the premiums are guaranteed never to go up. This also means that cash value grows more quickly and at a faster rate. The internal rate of return on a whole life policy on a younger person engineered for maximum cash value (maximizing paid-up additions) is currently around 4 to 5%. This is net of any fees and tax. That’s at least 10 times better than most bank savings accounts and GIC rates! This ability to store cash safely at a respectable rate of return is especially attractive for people who don’t like the risk of loss associated with investing.
You can save without the risks of the stock market, government control, management expense ratios, and opportunity costs. Or perhaps, you can use a policy as a tax-advantaged vehicle for cash removed from an RRSP. Owning life insurance on children or grandchildren can help you avoid an annual tax bill on the growth. Best of all, the money can be collateralized and used for any purpose you choose. That means it can keep growing even while being leveraged for an emergency, opportunity, or major purchase using an “infinite banking” strategy. Life insurance is often thought of as “insurance against death,” but whole life insurance is structured to provide benefits during the whole life of the policyholder. Many of the strategies used to benefit from whole life during your life are described in the powerful little book, “Live Your Life Insurance”, by Kim Butler, and the best-selling book by R. Nelson Nash, “Becoming Your Own Banker”.
This is a major motivation for many people who would like to transfer assets to heirs. If your intention is to transfer some or all of your wealth to heirs, life insurance for children or grandchildren is one of the very best ways to do it. You can pass nearly unlimited amounts of cash to the next generation via a “transfer of the policy to the insured”, income-and-gift tax FREE. There’s no need for probate, a trust, or even a will with life insurance! (Although trusts can be useful, and we always recommend having a will.) I can’t tell you how many times I’ve had to repeat that last sentence to stunned clients hearing this revelation for the first time. “Wait a minute… “tax free?” Yes, you heard correctly. There are no taxes when giving a life insurance policy, no matter how much cash value it holds, back to the insured. It must be set up correctly, but you can simply transfer the ownership of the cash value and death benefit to them (assuming they are of age). No muss, no fuss, no interference from the CRA or the government. In addition, the death benefit payout will always go to the named beneficiary(ies) - the next generation -100% tax-free. You are benefiting multiple generations, just with one policy. What if you had multiple policies? This is how the wealthy have transferred their wealth to the next generations for hundreds of years! PLUS, the wealth will snowball from generation to generation - taking care of ALL future generations. What a legacy that would be!
Cash value can be used in endless ways for the benefit of the policy owner and the insured child or grandchild. We are often advised to save or invest in ways that divide our wealth up into accounts, which we don’t control or can’t easily access. Too often, “our” money doesn’t feel much like ours as it becomes subject to the rules of our employer, the government, or some other entity. But in a whole life policy, the policyholder (owner) retains the ability to withdraw or collateralize the cash value—even when the insured is a child or grandchild. This is done without question… actually there are 2 questions from the insurance company – how much do you want and where do you want it sent?
What if your intention is to save for future college/ university tuition for the insured child? Investors are typically advised to invest money in the government-controlled RESP. There are up front grants and potential tax savings which might be attractive, though if college plans change, this will backfire. When saving in a whole life policy, the policyholder is not subjected to the restrictions of a RESP. The RESP has but one purpose, in the best-case scenario. Cash value can be used, or borrowed against, by the policy owner should they need it for retirement or non-education expenses. It can be withdrawn or leveraged to help the child purchase a car, a home, or start a business AND for their education.
If the child goes to college as planned, the money saved in a whole life policy won’t have to be declared and counted against them when it’s time to qualify for financial aid. And if the child chooses not to take the traditional university route, cash value can be used to fund a business, volunteer work, a self-designed internship, or other alternative life-education experiences.
Why give them a golden egg when you can give them the golden goose and teach them how to harvest the golden eggs for their entire lifetime?
While a commonly understood benefit, this is the one that nobody wants to talk about. Insurance for children is inexpensive, but funerals, memorial services, and other final expenses are not. Nobody deserves to be burdened with sizable expenses or debt in a time of grief. But final expenses aren’t the only financial concern that motivates some parents to get life insurance for their children. Life insurance traditionally insures the “human life value,” or lifetime earning value of the insured. In the case of life insurance for grandchildren and children, the parent or grandparent taking out the policy is also insuring their own income, which they know would be impacted in the event of such a loss. As one mother put it when a financial advisor asserted online that you should “never” purchase insurance for children,
I am a mother of two, and the primary breadwinner for the family. And I can tell you right now, though the chances are slim, if something were to happen to either of my children, I’m not sure when I’d be able to return to work. I can’t even make a guess. So, for me, having a financial cushion to make it possible for me to grieve without the worry of when and if I can return to work is a priceless safety net.
Additionally, some parents have been able to use life insurance benefits to fund charitable works done in the child’s name. They find that the ability to leave such a legacy gives some meaning amid such devastating loss.
Many policies offer an option to purchase additional insurance in the future, regardless of future insurability. While insurability is only rarely an issue for a minor, how often do young adults in their 20’s and 30’s “intend” to get life insurance, but never get around to it? You can avoid the potential for future health or lifestyle choices that may prevent them from getting life insurance at the times when they really need the protection. Guaranteeing insurability is a life-long benefit for the insured, whether they are one year old or twenty-one.
Yes, the insurance industry has some rules and restrictions, and you’ll want to be aware of the limitations. For instance, you’re somewhat limited in how much insurance you can purchase, which limits the amount of cash value you can build. Starting a family bank (as high cash value policies are often referred to) also requires a lot of communication and cooperation. It is imperative to teach the future generations good stewardship of the family wealth.
For more details about insuring children and grandchildren… reach out and we can discuss your circumstances, objectives, and answer all of your questions.
