(Note: I can not be held responsible for how you use this information. Always consult your financial advisor, accountants and tax specialists.)
Here are some frequently asked questions and some approaches:
What would be the purpose of getting a life insurance policy for a baby or a child under the age of 18? They do not have any assets or tax issues.
Starting a permanent (whole life) or permanent participating plan for babies/children is a very wise decision.
Although we do not want to think of our children passing away before us, we do not have a crystal ball. If they should, the cost of a funeral is quite high. In addition, you will need time for the grieving process. The last thing you want to deal with is financial issues. I urge every single parent to make sure they have a small policy.
Permanent life insurance policies for children are very inexpensive. For anywhere from $10 a month cdn and up, you can have a very nice plan. Especially if they are participating plans. (Participating means that the policies are pooled and then dividends issued once a year to the policy holders. Dividends can be used to purchase more insurance within the plan or can accumulate or pay out.)
Insurance is based on age, health and gender. If you purchase a plan while the child is young, you lock in the premiums for life. (If the plan costs $10, the premium will stay at $10.00 for the life of the insured.) Many companies have plans that can be paid up in 10 15 or 20 years. The premiums are higher to cover the cost of insurance. After the 10, 15 or 20 years, you have a paid up plan. We have policies that are paid up by age 65. There are lots of choices. Pick a plan that meets your objectives.
How does the ownership of the life insurance policy work?
Policies can be owned by the parents until they feel the child is ready to take over the plan- age 16 and over. Because permanent plans have cash value, parents may want to hang on to the policy so they are not cashed in. Parents can continue to own the plan and have the child pay for it if this is important to them.
How can I protect their insurability as they get older?
If your child becomes uninsurable or ratable later in life, by having the policy you started them with, they can have the peace of mind that they have some life insurance.
We often sell the policies with a Guaranteed Insurability rider. This allows the parents/child to purchase additional insurance, up to the amount specified in the contract, without medical evidence. Generally you can have the riders removed from the policy at any time.
The cost of the rider is not very much. Again, it provides a safety net for future insurability. We do not know if our children will become heavy smokers, drinkers, take drugs or have dangerous occupation/life style. All of these factors impact their insurability.
What about Education Savings?
Life insurance will also provide long term planning opportunities for your child/ren. Once they are older, they can use the policy to fund education expenses, purchase a vehicle or use for purchase of a house.
What if I do not want to continue paying for the play or I can't pay the premium?
Having a permanent or permanent participating policies opens up other options down the road as well. If you or the child does not want to continue paying the premiums you can opt to have the premium paid within the policy or have a reduced paid up plan. If you have some months where you are unable to pay the premium, if the policy has been in effect for enough time, you can take a premium loan.
If you miss a payment, you usually have 30 days to get the payment made before the policy lapses.
Should I/we invest in an Registered Education Savings Plan?
Registered education savings plans have changed in 2007. There are three types of plans- individual, family and group. Group usually has individual and family. You can get RESP's from any financial institution and independent companies (group).
I will do a separate post next week on RESP's.
I will not talk about Group plans as I do not provide this product to my clients.
How else can I save for my child's/grandchild's education?
Mutual Funds/Segregated Funds.
Some companies offer "In Trust For" accounts. Lets say you want to set up a savings plan for you newborn Sally. The plan is setup as "In Trust for Sally". The parent/parents are the trustee for the plan. All cheques deposited into the plan must say- "In Trust For". No one can take the money out except Sally. Once Sally reaches age 18 the fund is turned over. If she chooses not to go to school, she can move the money into a tax free savings account or a registered retirement savings plan. She can use the money for a major purchase- vehicle, house etc.
Generally you can have the plan set up so more than once person can contribute to the plan.
Mutual funds and Seg Funds are essentially the same thing. The difference is seg funds are covered under the Insurance Act and Mutual funds are covered under the Bank Act. With Seg funds under the Insurance Act there are more guarantees and protections. In addition, the money flows to the named beneficiaries- outside of the estate- if they annuitant/owner passes away. This is just a brief overview. It is important to understand the tax issues regarding growth with this type of plan and to get plan details from a licensed advisor.
Before purchasing any fund you will be given a prospectus. Make sure you clearly understand how the advisor is paid their commission; what expenses will be applied to the funds; if there are additional charges; what happens if you withdraw all or some of the money; how rates of return work. Your advisor should be doing a risk profile so that you are put into the proper fund mix.
What about Critical Illness Insurance?
Yes, you can purchase Critical Illness insurance for children starting as early as a few days old. If you remember the statistics, they will have a much higher chance of having a critical illness and living than of dying a premature death. The biggest question to ask is- "if my child becomes critically ill how will I manage the financial impact?" Do some research about what is covered. Ask someone you know who has had to deal with a critically ill child.
Critical Illness insurance (ours for sure) covers up to 24 illnesses including coma. It is a lump sum paid out tax free, after surviving 30 days after a critical illness diagnosis.
There are many plan choices and rates. You can have a locked in premium with return of premiums on death or expiry. It is important to take your time to pick a plan that will fit with your budget and your desires.
If you feel that you want to cover this risk in another way, make sure you include this in your financial planning.
What about using my will to fund my children's education?
You can set up a trust within your will for your children's education.
You need to contact an estate lawyer or a lawyer that specializes in wills. Of course this will only come into play if upon your death but it is a consideration. If you choose to do this through your will, then it is important that you have the assets to cover the cost of the trust. If you are not sure if your assets will be sufficient, take out a life insurance policy naming your estate as beneficiary. Just know if you pick this option, the funds going to the estate will be subject to probate fees.
Optionally, take out a life insurance plan - term will work fine- and name your spouse, children or someone you can trust to carry out your wishes, as your beneficiary.
Ensure you check out the costs of having the education trust set up within the will before you book your appointment with the lawyer.
There are also Guaranteed Investment Certificates and other investment options.
In closing:
Deal with a reputable financial institution and advisor. You should be reviewing your plans at least once a year and more often if your circumstances change. It is your advisor's job to inform you of new products and changes in the market. It is not about selling you, it is about giving you the information. Ultimately it is up to you to decide if you are going to cover the risk, plan how you will cover emergencies, large purchases or retirement.
(Note: if you want me to contact you directly about any of this information, please post a comment. Leave me your email address. All comments are moderated and I will not post them if they are personal. I will not share any of your personal information or pass it on to anyone.)
Love and All Good Things,
The Peaceful Matriarch
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