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Insuring Your Children

The value of insuring your children can last a lifetime.

Life insurance is traditionally purchased by adults to cover the catastrophic loss of one of the income producers in the family. Upon the death of the insured, the insurance company pays out money to pay off existing mortgages, credit cards or lines of credit, pay for funeral expenses or provide adequate principal to allow the survivor to support the family.

Insuring a child’s life goes somewhat against human nature because no one likes to think their child may die and from that death there may be financial reward. But, if individuals can put aside the emotional aspect of insuring children, they may find it not only makes economic sense but may be one of the best investments for the child’s future.

Many More Health Risks Today
Today’s children travel more than their parents did when they were children, are exposed to a multiplicity of cultures, ingest products and use items made with synthetic compounds that were not available in the past. They are subjected to more pollutants over a longer period of time and from a younger age. There is no guarantee that today’s healthy child might not be incapacitated by cancer, asthma or a life-altering injury. Purchasing insurance at a young age before mishaps occur that may make the child uninsurable as an adult will, under most circumstances, guarantee insurance will be available in the future. Most insurance companies have policies that include insurability riders that permit the child to upgrade coverage without a medical.

If your child waits until 21 years of age to purchase a policy and is required to take a medical they may discover they are uninsurable. The consequence of being denied insurance coverage is life altering as it makes it difficult to insure a mortgage loan, provide for dependants and in some instances may limit the benefits available in employment.

The probability of a child dying is statistically low. Nevertheless, should the child die, even a small death benefit would provide financial assistance for funeral arrangements at a period in life when most families are struggling with mortgage payments and the other costs of living.

The child rider usually expires at the age of 21.

Types of Insurance
Ask your insurance agent about the following:

Child Rider: This is added to a parent’s life insurance policy and is the least expensive means of insuring children. The policy payouts are minimal — in the $10,000 to $25,000 range. Depending upon the insurer, it may be possible to insure all the children in the family for the same payout amount for a single premium.

The child rider usually expires at the age of 21. However, policies may have provisions that allow the child insurance to morph into a stand-alone policy for the new adult. This has the great advantage of not requiring a health examination to determine insurability.

Whole Life or Universal Life: This type of policy insures your children’s lives. Each child would have their own policy for life regardless of how long they live. Premiums are split between premium amount and investment to enable a cash surrender value to accumulate. Do not count on this policy to pay for the child’s higher education. Low returns on the small premiums invested will only provide enough savings to defray some of the education costs. And, of course, they will be able to draw on the cash surrender value of the policy if funds are required.

Term Life: Term life is the most inexpensive policy on the market. There is no cash surrender value. The cost for insuring a young child for $250,000 could be as little as $20-25 per month. Why should you purchase such a high amount of insurance on your child? Consider that when the child comes of age they can take over the policy at its face value and will not have to worry about whether insurance can be purchased.

You Should Know
Children’s plans with a base face value and a premium fixed for an established term can be put in place from the time the child is 14 days old up until 12 years of age. The policy’s face value will increase without an increase in the monthly premium. For instance, a policy with a face value of $35,000 would increase to $70,000 when the child reaches 21. Until 28, the young adult has the option of increasing the insurance to $350,000 without a medical exam. This policy provides a cash surrender value from the commencement date to either the date of death or the date the policy is cancelled. The cash surrender value for the $35,000 option from the age of one to 21 could be in the $7,400 range. In that the premium cost for this policy is about $31 per month over a 20-year period, the cost of the insurance is offset by the cash surrender value available.

Call Your Agent
Surprisingly, the number of insurance companies that provide specific information about children’s life insurance on the Web is minimal. Combine that with the fact the insurance that may be offered can change depending upon your province or territory of residence, it is in your best interest to contact your insurance broker and have a serious talk about any insurance available for your children.

Tax Consequences
Premiums paid for insurance coverage are not tax deductible. Proceeds from insurance policies are not taxable in Canada. Amounts borrowed from the cash surrender value are not considered income and therefore are tax free.

Your Children Will Thank You
Life insurance for your children may seem a thankless gift your children will not fully understand until they mature. At some point down the road, when they purchase their first house, get married, or bring their first child into the world, they will understand the importance of what you did so many years ago and say thank you.


August 2012

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Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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