child girl holding ladybug umbrella

Examining the pros and cons of this option as part of a family plan.

Insurance for children is a topic that generates debate among some, with much of the uncertainty around it arising from traditional thinking of insurance simply as income replacement. With such a narrow scope, it’s easy to see how it could be justified as irrelevant for children since they don’t earn income or earn very little income, at best. However, broadening the perspective to view it as an investment vehicle and a supplementary means to help prepare for a child’s future opens up significant benefits and value.

Wide-ranging pros

Most individuals want to structure their financial affairs in tax-advantaged ways, and insurance provides an additional asset class to tax shelter investible assets. Specifically in this regard, insurance may offer a very effective option for parents or grandparents who have assets they won’t otherwise spend, and that are potentially earmarked to go to the child via a will or trust, for example — especially given the fact that tax-advantaged investment vehicles for children are quite limited. Another benefit lies in the fact that the parent retains control of the asset when setting up insurance on a child’s life. It’s only when the asset ultimately gets transferred to the child that it becomes part of the child’s portfolio, and the transfer itself is considered a non-taxable event.

Other advantages exist within insurance policies that have cash values, which provide financial flexibility later in the child’s life to utilize those values, even for retirement planning. Certain policies may also be paid up over a specific time frame, and the values may continue to grow even after the policy is paid up.

Specific to a child’s future, there are positives in the fact that a policy reduces uninsurable risk down the road — regardless of future health status, their premiums are locked in. Furthermore, the premium now would be less expensive than if the insurance was purchased later in life.

A matter of options

When looking at insurance as an investment vehicle, a main downside for some is the opportunity cost — not every dollar is created equal and this type of investment is one that doesn’t bring immediate benefits. However, when looking at investible assets as a whole, it’s important to consider both the short- and long-term. While it does take time for the growth to occur, which some individuals may view as a negative, the upside is in the significant long-term positive impact. In other words, the slower rate of growth is not an inherent con for everyone; the disadvantage arises only if it doesn’t fit with the purpose of the investment or as part of a well-balanced plan. And this is where an RBC licensed insurance advisor can help to determine if, how, and when insurance is a beneficial investment vehicle, specific to each family’s needs.

Upcoming CRA changes

Effective January 1, 2017, changes to the Income Tax Act will impact the structure of new policies. Generally, policies issued prior to 2017 will be grandfathered and subject to more favourable legislation.

father son wheelchair

Living benefits for children

While many parents are vigilant about personal insurance to assure their family will be taken care of in the event of a devastating life occurrence, some overlook the importance of Living Benefits for children. If a child suffers a significant illness, the likelihood is one or both parents’ careers are going to be put on hold, creating a negative financial position in the family. A fact many people don’t realize is that some Living Benefits policies offer refund of the premiums if no claims have been made after a specific time period.

This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc.*, RBC Phillips, Hager & North Investment Counsel Inc., RBC Global Asset Management Inc., Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliate, Royal Mutual Funds Inc. (RMFI). *Member – Canada Investor Protection Fund. Each of the Companies, RMFI and Royal Bank of Canada are separate corporate entities which are affiliates. “RBC advisor” refers to Private Bankers who are employees of Royal Bank of Canada and licensed representatives of RMFI, Investment Counsellors who are employees of RBC Phillips, Hager & North Investment Counsel Inc. and the private client division of RBC Global Asset Management Inc., Senior Trust Advisors and Trust Officers who are employees of The Royal Trust Company or Royal Trust Corporation of Canada, or Investment Advisors who are employees of RBC Dominion Securities Inc. In Quebec, financial planning services are provided by RMFI which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RMFI, Royal Trust Corporation of Canada, The Royal Trust Company, or RBC Dominion Securities Inc. Estate and trust services are provided by Royal Trust Corporation of Canada and The Royal Trust Company. If specific products or services are not offered by one of the Companies, clients may request a referral to another RBC partner. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but neither the Companies, RMFI, nor Royal Bank of Canada, nor any of its affiliates nor any other person can guarantee accuracy or completeness. This publication is not intended as nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your RBC advisor. None of the Companies, RMFI, Royal Bank of Canada nor any of its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. In certain branch locations, one or more of the Companies may carry on business from premises shared with other Royal Bank of Canada affiliates. Notwithstanding this fact, each of the Companies is a separate business and personal information and confidential information relating to client accounts can only be disclosed to other RBC affiliates if required to service your needs, by law or with your consent. Under the RBC Code of Conduct, RBC Privacy Principles and RBC Conflict of Interest Policy confidential information may not be shared between RBC affiliates without a valid reason.

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