Life insurance for kids: Do you really need it?

We’re not just talking about planning their first birthday party though. Besides saving for their education with an RESP, you should consider life insurance as well. It may be uncomfortable to think about, but it’s worth the effort to prepare for the what-ifs. 

“Life insurance is about the people who are left behind,” explains Lorne Marr, director of business development at Hub Financial and founder of LSM Insurance. “You have to think of it as a financial instrument that will give you time to grieve. You don’t want to have to rush right back to work if a child passes away.”

There are sunnier reasons for getting life insurance for your child though. So, while your new babe is having a nap, here’s a quick rundown of everything you need to know about buying a policy for kids.

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Why do I need life insurance for my kids?

Aside from financially preparing for an untimely death, insurance can also help children be protected and secure with their health and finances throughout their long lives.

While some policies—specifically term insurance—are very affordable and are designed purely to provide life insurance, other types of policies cost more but may work harder for you. A “participating” permanent insurance policy, for instance, is also an investment vehicle that collects dividends and accumulates cash. (“Non-participating” means no dividends are collected.) Over the years, you can grow an extra nest egg that can help pay for university, or make a down payment on a first home or car easier.

“A child may be healthy today, but they might develop diabetes, autism or colitis, which will make getting insurance for them very challenging as adults,” adds Marr. If you lock them into a policy now, they can often convert it into a policy as an adult that’s guaranteed without a medical exam. This feature means their premiums will likely be based on their healthier, younger selves, and will be more affordable than if they applied on their own. Marr says this option depends on the insurance carrier, so ask if it’s available first. 

Who doesn’t need life insurance for their child?  

At the end of the day, buying insurance is a personal choice. But keep in mind that unexpected funeral costs, as well as lost income from a leave of absence that allows you time to grieve, can be covered for as little as $3 per month. 

However, Marr adds, don’t overspend to accommodate life insurance for your child. He suggests budgeting for your own coverage first—as well as paying off credit cards and lines of credit—before taking on this extra expense. “Have your financial house in good order, and then you can start paying for life insurance for your child.”

The pros and cons of life insurance for kids–and the costs, too

Not sure about what’s out there for your children? Here’s a quick rundown of the more popular insurance policies and prices for children.

Term Insurance

Average premium: As low as $3 per month.

Need to know: There are two options: a child term rider (CTR), which is an add-on to your equally affordable term policy (meaning you’ll have to be insured first); and standalone term coverage, which is the child’s own policy.

Pro: This is the most cost-effective way to get started, and many policies cover multiple children at once for a low premium.

Con: Its value is limited, generally capping at around $35,000 per child.

Insurance shopping tip: Look in to a convertible option, which transitions when your child is an adult into a more valuable permanent policy—without a medical exam required. For example, you could pay $2.50 a month for $10,000 of coverage and, when you child is age 25, that coverage can be converted to $250,000 as standalone insurance.

Permanent Insurance

Average premium: $50 a month or more, depending on how much cash value you hope to accumulate.

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:

Have a budget in mind: Whether it’s $10 or $50 a month, know what you can afford to spend and stay within your budget.

Proof of identity: Have IDs for both you and your child, such as a social insurance number, birth certificate or passport.

Proof of income: A pay stub or a letter of employment will work.

Proof of address: You can use a signed lease or a letter from your landlord if you’re renting, while homeowners can provide a mortgage bill or a property tax statement.

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