Need to know: There are “participating” and “non-participating” permanent policies. Participating policies collect dividends, while non-participating do not. Buying participating (also known as “whole life”) insurance for a child is a popular choice.
Pro: Unlike a CTR (mentioned above), its value isn’t capped, and it provides life insurance while side-hustling as an investment vehicle. In the future, any dividends can be accessed to help pay for major costs (think tuition or a first home) or used as collateral for a loan.
Con: Its growth is comparable to the incremental gains of a GIC, so manage your expectations.
Insurance shopping tip: A parent owns a child’s policy, so be sure to transfer ownership of the policy to your child as soon as they’re old enough (think early 20s). This will help to avoid tax implications from holding onto it too long and letting its cash value accrue—that’s when the CRA will want a closer look.
More options: Universal insurance collects dividends like whole life; however, there’s the flexibility to direct the investments yourself, versus the insurance company directing your funds. Term-to-100 and whole life non-participating are pure life insurance products with no growth opportunities.
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Why a permanent policy costs more than a child term rider
Whether you’re buying life insurance for yourself or for your child, premiums for a permanent policy will cost more than those for a term policy because of their extra features and benefits. Here’s what’s behind the sticker price:
- Unlike a CTR, it’s an independent policy that is managed separately from yours
- It offers lifelong coverage and never expires
- Its value can be as high as you want it to be. (For example, if your teen is a pop star, the $35,000 cap of a child rider likely won’t offer enough payout)
- If it’s a participating policy, it collects dividends. And the higher the policy’s value, the more growth potential there is. That’s extra cash that your child can access one day to help afford major life purchases, like schooling or a down payment on a home
How soon should I buy a policy for a child?
Some insurance companies offer policies that take effect as soon as a child is 15 days old. When starting this early, there’s the benefit of having more years to collect dividends on a participating permanent policy. “If your child is already a teen, you can still buy insurance,” says Marr, “[but it] will likely be a smaller policy, with less time to accumulate growth.” Also note that prices and premiums generally go up with age.
How to buy life insurance for a child
If you decide to get life insurance for your child or children, there are some things you’ll need to have at the ready. And as you’re a new parent, you know every minute counts! So, start the process as hassle-free as possible and have these essentials on hand for your insurance broker, agent or provider. They may ask for any or all of this information during the application and/or quoting process: