Should you take out a life insurance policy for your child? This is a question that most parents probably don't want to think about. The reality, however, is that many do. Their reasoning is that in the event of the death of a child, they would be so devastated that they would no longer be able to work. Insurance money would help them get through this difficult time.
While this may be a valid reason to purchase a policy, Ed Rempel, CFP at Armstrong & Quaile Associates, does not recommend doing so. Life insurance, he says, is an income replacement.
The calculations for securing a parent's income are well known. If something happened to this parent, the insurance would pay enough money to cover expenses like mortgage payments and child-rearing. But no insurance covers psychological trauma, on which it is impossible to put a price. “If a child dies, their parents will go through the grieving process, but they will still go back to work,” says Ed Rempel.
A child does not earn money, so there is no income to replace. “You have to consider the real need. A child pays nothing. Children actually cost more than they report, “said Ed Rempel. From a purely financial point of view, he adds – while admitting that this is an argument difficult to hear – the death of a child will have the effect of reducing the expenses of his parents.
As James McKeown, senior insurance specialist at Edward Jones explains, it is understandable that parents temporarily stop working after losing a child. Families need to be able to manage their grief. But even if the pain never goes away completely, it's still unlikely that parents will quit their jobs for good. “Insurance is not used to overcome an emotional shock, but to compensate for a financial loss. $ 500,000 will not make it easier for a grieving parent. “
Despite everything, ensuring your child's life can sometimes be justified. Most insurance companies allow parents to do this by adding an endorsement to their existing policy, at an additional cost that can be as low as $ 2.50 per month. In the event of the death of the child covered by the endorsement, his parents could receive between $ 10,000 and $ 15,000 to pay for the funeral expenses. Of course, this insurance will not be offered if the child's health is poor at the start.
The rider also gives the child the option of purchasing life insurance of around $ 250,000 (this figure varies by company) once he reaches the age of 25. This insurance will be granted automatically. Some insurers even offer $ 150,000 in life insurance and $ 100,000 in critical illness insurance even if the person has pre-existing medical conditions that would normally prevent them from being insured.
In most cases, the endorsement is sufficient. James McKeown, however, saw some people take out an independent $ 50,000 policy on behalf of their children to cover funeral expenses and a few months off work. Generally, insurers will not let you insure your child's life for more than $ 250,000, and they will start to be suspicious from $ 200,000. “They don't want people to profit from the death of their child. “
There is, however, a very simple reason why it is useless to secure the life of a child: the majority of people do not die at a young age. The very low death rate explains why policies are so cheap for people in their 20s. However, even if it does not cost them a lot, parents who insure their child will still have to pay a certain amount each month. That money would be better spent elsewhere, says Ed Rempel.
If there is no real reason to justify it, why was this practice relatively common 30 years ago? In the 1970s and 1980s, many parents purchased whole life insurance for their children, but only because these products served as savings vehicles. The policy could later be exchanged for its cash surrender value.
With today's low interest rates and the growing popularity of savings vehicles like RESPs (launched in 1974, they caught the attention of investors in the late 1990s, when the government began offering matching grants), it is no longer relevant to take out whole life insurance for savings purposes. “Some career insurance agents are still trying to sell this product, but it is an absurd concept. There are much better ways to save than this, “says Ed Rempel.
In his opinion, if you are in your twenties or thirties and have an old life insurance policy, it would be better to buy it back rather than continuing to pay the premiums. The amount you get will be much higher than what the police would pay when you die. You can then invest this money in an RRSP or TFSA.
If you absolutely want to insure your child's life, concludes Ed Rempel, the best option is a 20-year temporary policy. It is inexpensive, and when it expires, your child will be able to decide if they want to purchase their own insurance.