Over 22 million Canadians hold life insurance policies. Only a tiny fraction of these policies cover children.
But why do parents ever buy life insurance for children in Canada? After all, life insurance traditionally covers the income lost when a wage-earner dies. If children have no wages and no dependents, what benefit does life insurance serve?
Keep reading for the surprising answers to these and other questions about life insurance for kids.
Life Insurance for Children 101
What is life insurance for children, exactly? For the most part, children's life insurance policies mirror adult policies of the same type.
Policyholders choose a policy and pay monthly or annual premiums. In return, the insurer agrees to pay out a set benefit in the event the person covered by the policy passes away.
The primary difference, of course, is that while adults typically hold policies on themselves, children's policies must be held by someone else. Usually, this is their parent or guardian.
Buying insurance for a child also tends to be faster and easier than buying an adult policy because insurers do not require physical exams with youth policies.
Minimum age limits for policies vary from provider to provider. In general, however, parents can buy policies for a child any time after the child's birth.
Most insurers cap child insurance policies at 17 years of age. If a child does not already have a policy by the time they turn 18, they or their parents must purchase an adult policy to cover them. Some insurers do set lower maximum ages, so parents who want the widest range of options should begin shopping for coverage early.
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Average Coverage Ranges
The question of how much coverage a parent should purchase for a child can be tricky.
In theory, children have no dependents or income to replace. Thus, parents only need to purchase enough coverage to pay for a funeral and related expenses. On average, that works out to between $6,000 and $9,000.
In rare cases, a child may be substantially contributing to the household income. In those cases, parents need to calculate the child's income and base their policy on replacing that amount just as they would when buying a policy for an adult wage earner.
Finally, some families choose to use fully-paid insurance policies as investment vehicles for their children's futures. Parents who intend to use insurance policies in this way need to determine:
- What their investment goals are
- Whether they will use the policy alone or in conjunction with other investment tools
- How much they can afford to invest this way annually
Their ultimate decisions will be based on the answers to those questions.
Should You Get Life Insurance for Your Child?
Whether or not to buy kids insurance is a decision every family must make on its own. Not all families will see the same return on investment from buying a policy.
Parents should review their needs and circumstances and the pros and cons of children's life insurance carefully before purchasing. When in doubt, it is best to seek the advice of a qualified financial advisor before buying a policy.
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Child Term Rider vs Whole Life vs Stand-Alone Renewable Coverage
Canadian insurance for kids comes in three primary forms. Each option has benefits and drawbacks.
Whole Life Policies
Whole life policies are the most common form of child insurance. As long as their premiums are up to date, these policies provide lifelong coverage. They are appealing because they:
- Tend to have locked-in premiums that will not rise over time
- Can be used to build cash value that can be taken out and used for almost any purpose
- May provide appealing tax benefits to the policyholder
Whole life policies can be between five and 15 times more expensive than other insurance options. However, they can also be an invaluable life-long gift from parents or grandparents to children, particularly children who develop conditions later in life that would have made them difficult or impossible to insure.
Stand-Alone Renewable Policies
Stand-alone renewable policies are essentially term life insurance for children. They cover a child for a set period of time, often in five- or ten-year increments.
In most cases, parents of older children use these policies to obtain short-term coverage for their children that they then roll over into an independent adult policy when the child comes of age.
Child Term Life Insurance Riders
For parents thinking "I want to insure my kid but I don't have a lot of money to buy a policy right now," riders are the way to go. Children's insurance riders can be added to most adult life insurance policies and provide inexpensive child life insurance coverage.
Riders cover children up to a set age. At that time, policyholders can convert the rider to a full independent policy for an extra fee.
Advantages of Children's Insurance
What benefits do families reap from investing in potentially costly insurance for kids?
For many families, the biggest reward is the peace of mind that comes with protecting a child's insurability. Up to 60 percent of adults have at least one chronic health condition and around 40 percent have two or more such conditions. Worse, the age of onset for conditions of all kinds is dropping.
This means that families who wait to insure their children until those children become adults face the risk that:
- The child will develop a condition prior to buying insurance
- They will have difficulty finding a company willing to insure them due to such a condition
- They will be forced to pay very high fees for a policy based on their health when buying an adult policy
By contrast, buying a child policy can lock in insurability and affordable rates, regardless of any changes to a child's health down the line. Similarly, having a policy already in place can lock in good pricing even if the child later takes up "dangerous" hobbies or a profession that would otherwise drive up policy rates, such as becoming a firefighter, pilot or any number of other high risk jobs.
This benefit is most valuable to families with a history of chronic or severe health conditions for which their child is at high risk, such as diabetes.
Starting early saves money even if your child remains healthy. Experts estimate that policyholders pay an average of $20,000 less over a lifetime when policies are purchased for newborns and continuously kept up than if the same person waited to purchase insurance until they were an adult.
Of course, policies also carry value in that they pay for funeral expenses in the event that a child dies. While funerals may not break the bank by themselves, they can be challenging to pay for if they come on the heels of a lengthy illness or steep medical bills. Having insurance can provide peace of mind and ensure that families will be able to hold the type of funeral they want to if the worst happens.
The other much-lauded benefit of a child life insurance policy is that families can use it as an investment vehicle. This does not apply to riders but, with dedicated policies, a portion of the monthly premium is set aside. Over time, this builds a pot of tax-privileged accessible cash that children and their families can access later on for a variety of purposes.
Why You May Not Want It
Even the best life insurance for children may not be worthwhile for many families. Often, the cost-to-benefit ratio simply doesn't pan out.
Children do not tend to contribute income to a household. As such, insurance policies on them often serve only to pay for funeral expenses. Given the cost and the amount of time it takes to build up to full pay-out benefits, many families are better served by simply putting money into an emergency fund they can tap into in the event of death instead.
Poor Investment Vehicles
While life insurance for children in Canada is often touted as a great investment vehicle, it does not actually compare favorably to many of the alternative options. For example, a tax-free Registered Education Savings Plan (RESP) allows parents to put money away and receive contributions of up to 20 percent from the federal government. When children withdraw that money to use for educational purposes, they also pay the lowest possible taxes on it.
RESP and similar programs provide much higher returns on investment than using a life insurance policy as a savings vehicle.
While children's policies can lock in coverage at low rates, they may not provide enough coverage long-term. Many families find that they need to upgrade to higher coverage levels when their child becomes an adult. This increases their costs and largely negates the value of the original policy.
Insurability Isn't a Problem for Everyone
Certainly, insurability can be a concern for families with complicated medical histories heavy with early-onset disease. However, most healthy young adults have little trouble finding affordable life insurance. As such, many families are better served by waiting until their children turn 18 or 21 and helping them purchase adult policies at that time.
Once families buy a policy, they are stuck with it. This can mean paying costly premiums for years or even decades. This can become an enormous burden during periods of financial stress or limited income.
If policyholders cancel the policy because they can no longer afford to pay the fees, they lose their investment.
Finally, it is important to keep in mind that money invested in children's life insurance is money not being invested in something else. Often, there are other things that families can invest in that are substantially more likely to benefit the child and the family as a whole in the long run. Examples include:
- Higher-coverage life insurance policies on parents or guardians
- Better-padded general emergency funds
- Dedicated and tax-privileged education funds
- Quality of life investments such as better housing, better health care, or broader life experience
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Choosing Life Insurance for Kids in Canada
Buying life insurance for children in Canada will not be the right choice for every family. But knowing the pros and cons can help you make the best choice for your needs. Learn more about insurance products that might be right for you today by browsing our blog.