BY ANDREW STEWART
If you were to pose the question should you buy life insurance for your kids to three different financial services professionals, it’s very probable that you would get three different responses. What I find interesting is that it demonstrates several things. Firstly, insurance is still a very misunderstood and sometimes misrepresented product, even amongst industry professionals. When responding to this question, it must be clarified what type of life insurance we are talking about. There are several types of life insurance and each is very different from the other:
- Term Insurance – short term protection for the lowest initial cost.
- Ideal for mortgages and debt but never a child.
- Universal Life or Non Participating Whole Life Insurance – combines permanent life insurance protection with a tax-advantage investment component.
- Suitable for high net worth business owners or professionals.
- “Participating” Whole Life Insurance – combines tax free compounding cash growth which the parent or child can use for anything they will need in life, with permanent fully paid up life insurance that grows in value throughout their life.
- Ideal for savings, life and final expenses.
So, getting back to the question of whether or not you should you buy life insurance for your kids. A financial professional who is a believer in life insurance for children may give the following reasons. “It allows them to have coverage which is locked in at an affordable rate, regardless of if they have a change in health down the road. This can be particularly advantageous if the child would be unable to get life insurance as an adult, due to existing health issues.” The most common and unpopular reason is that “it gives the parents the necessary time to properly grieve their child’s loss and not have to rush back into everyday life.”
Although these are all good reasons, they only tell part of the story. If a professional is referring to a “Participating” Life plan, they would have mentioned the incredible cash savings the child would have access to in the future to help pay for life’s needs, rather than the death benefit to the parent if the child passes away.
A certified financial planner may say “It’s the dumbest idea to buy whole life insurance for your child. There is the cost of the funeral, but otherwise your financial responsibilities would be reduced from not having to provide for that dependant. If the cost of the funeral is a concern, you would likely be better off saving yourself the cost of premiums and adding that same amount into your emergency savings. Life insurance should be purchased to cover financial responsibilities such as remaining debts and providing for dependants.”
A trust and estate practitioner may believe life insurance on children should be included as part of a comprehensive tax and estate planning discussion with parents. Other reasons for buying life insurance on children include using it as an education-funding vehicle, or for those of higher net worth, as a tax-free transfer of wealth from parents to children or grandchildren.
I believe one of the biggest and most forgotten aspects about life insurance is the intergenerational wealth it creates. It is a rare occurrence that you will become wealthy in your life time. But through life insurance it can affect several generations, with one large influx of capital through their parents’ or grandparents’ policies.