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.
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.
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.
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