Pros and Cons of Children’s Life Insurance in Canada

Children’s life insurance is a topic that often sparks debate among parents and financial experts. While it may seem unusual to consider insuring the life of a child, there are arguments for and against this type of coverage.

In Canada, children’s life insurance policies are available, and it’s essential to understand the pros and cons before making a decision. Let’s explore them in detail.

Pros of Children’s Life Insurance:

1. Protection for the future: One of the primary advantages of children’s life insurance is providing financial protection for the child’s future. Life insurance policies can offer a death benefit that helps cover funeral expenses and any outstanding debts in the unfortunate event of a child’s passing. Additionally, certain policies can be structured to accumulate cash value over time, which can be used for education or other significant expenses later in life.
2. Guaranteed insurability: Purchasing life insurance for a child at a young age ensures their insurability, regardless of any future health issues they may develop. If a child develops a medical condition later in life that may affect their ability to get insurance, having an existing policy can offer financial security and potentially avoid higher premiums or exclusions.
3. Lower premiums: Children’s life insurance policies typically have lower premiums compared to policies for adults. By starting coverage early, parents can lock in lower rates for the child’s entire life, saving money in the long run. Additionally, some policies offer the option to convert into larger coverage amounts or different policy types without requiring further medical underwriting.
4. Building cash value: Certain types of children’s life insurance, such as whole life or universal life policies, can accumulate cash value over time. This cash value can grow on a tax-deferred basis, providing a savings component that can be accessed later in life. It could be used for education expenses, a down payment on a home, or even starting a business.

Cons of Children’s Life Insurance:

1. Limited financial need: One of the main arguments against children’s life insurance is that the financial need is often limited. Children typically don’t have significant financial responsibilities or dependents. The primary purpose of life insurance is to replace income and provide financial support for dependents, which children usually do not have. As a result, the benefits of a children’s life insurance policy may not be fully realized unless there are specific financial obligations that need coverage.
2. Opportunity cost: Investing in children’s life insurance means diverting funds from other potential investments that could offer greater returns. Instead of paying premiums for a children’s policy, parents might consider investing in a tax-advantaged education savings plan, such as a Registered Education Savings Plan (RESP) in Canada. These plans can provide a higher rate of return and more flexibility in using the funds for the child’s education.
3. Potential over insurance: Some argue that purchasing life insurance for a child could lead to over insurance. The death benefit of a children’s policy is typically much lower than what is necessary for an adult policy. In case of a tragic event, the parents may already have sufficient coverage to handle the financial impact. It’s important to assess the overall insurance needs of the family before considering a separate policy for a child.
4. Changes in insurance needs: Life insurance needs change as individuals grow older and their financial responsibilities evolve. It’s possible that a policy purchased for a child may not align with their future needs. As the child becomes financially independent, the coverage may no longer be necessary, and the premiums paid over the years may not provide a sufficient return on investment.

Conclusion:

Deciding whether to purchase child’s life insurance in Canada requires careful consideration of the pros and cons. While it can offer protection and financial benefits, the limited financial need and potential opportunity cost should also be.