Discussing life insurance for children is not a pleasant topic. But should the unthinkable happen, having this insurance in place would mean you can focus on what is most important to you. A payout from your insurer would allow you to take extended leave from work when you need to, without having to worry about the financial consequences. Taking out a life insurance policy for your child while they are young will also allow you to secure low rates from your insurer. Furthermore, if you opt for a whole life policy, you can set up a savings vehicle for your child’s future. Find out more about life insurance for your child in Canada and whether it is the right choice for your family.
Babies and Life Insurance
Life insurance for babies may seem unnecessary, even absurd. Life insurance, when all is said and done, is primarily an income replacement tool. It replaces all or a part of the primary earner’s income so that the people dependent on them can live comfortably after their death. While the life insurance needs of each family are unique, at a bare minimum the benefit amount should be 10 times the annual income. For instance, a person earning $200,000 a year needs $2,000,000 in life insurance.
Since babies do not contribute to the family’s income, buying an insurance policy for them may not be the best way to spend your money. The death of a child, while tragic, has few financial repercussions. Considering this, some might argue that instead of taking out a policy on a baby’s life, it would be much better to invest that money to cover a future expense, such as college tuition fees. That said, there are certain situations — which we will cover — when buying life insurance for a newborn is a reasonable decision to make.
When Buying Life Insurance for Babies Makes Sense
There are two main reasons for buying life insurance for your child.
A funeral or burial in Canada costs upwards of several thousand dollars on average. A life insurance policy can pay for a child’s funeral, saving your family money and financial stress should the unthinkable happen. In the event of a long-term illness, the payout could also help you meet medical expenses not covered by your health insurance policy.
Secondly, coverage for children is likely to be less expensive because they are young. You can secure a low monthly rate, ensuring your child has affordable coverage for themself when they become an adult. Once they are an adult, they can augment the insurance policy as per their individual needs. It is far cheaper to augment a current policy than to purchase a new one.
Furthermore, you can usually add a child rider to your life insurance for as little as $5-10 a month. For instance, adding a $10,000 child rider to your term policy might not cost you more than $5. If a few dollars a month brings you some peace of mind, it is worth it.
Does a Child Need Life Insurance?
Talking about buying life insurance for kids is a taboo subject in most families. That is because it means thinking — and planning — for the situation that is feared most. Most parents are too busy changing diapers and round-the-clock feeding, that they might not even have time to give this topic a thought.
However, life is full of uncertainty, and an infant life insurance policy could make things easier if the worst were to happen. Many parents with sick children incur substantial financial losses on account of having to take time off work. Life insurance cannot reduce the pain of losing someone you love, but it could help ease your financial worries.
Statistics show that roughly 2,000 Canadian newborns do not live long enough to celebrate their first birthday. The mortality rate in this group is about 0.5%. While that does not appear high, it is nearly the same mortality rate as people in the age bracket of 55-59 years, most of whom will have a life insurance policy. From this perspective, buying life insurance for a child in Canada seems like quite a sensible thing to do.
Life Insurance Coverage Options for Children
Parents looking for an infant life insurance policy frequently ask: What are the various available options?
Well, there are three ways you can buy life insurance for your child in Canada. These are:
- Child Term Rider (CTR) – Do you already have a life insurance plan in place? This is the easiest and most affordable way to cover your child’s life. All you have to do is call your insurance company and add the rider. The premium for CTR rider can be as low as $5. With this rider in place, your child will be insured up to a specific age, generally 21-25.
- Stand Alone Term Renewable Coverage – As the name suggests, this is a separate policy that you take in your child’s name. You have the option to renew the policy at fixed intervals without submitting proof of insurability. If you want, you can convert the policy into whole life or permanent, without a medical exam. Among all the types of life insurance in Canada, term life insurance is the most popular. That is hardly surprising since it is more affordable and provides coverage for only the period when you need it the most.
- Whole life or Universal life insurance – A whole life or universal life policy provides coverage for a lifetime. As such, both are more expensive than a term policy. Since there is no expiry date, the policy will pay the death benefit regardless of when the insured dies. Whole life policies and universal life policies also include an investment component. A part of your premium payments is funneled into this account, which grows on a tax-deferred basis. However, the rate of return is usually much lower than conventional investment channels, and fees higher. That is why unless you are a high-net-worth individual, buying a universal or whole life policy for your child might not be the best option for you.
The cost of life insurance does not depend as much on the insurer as it does on the type of coverage. That said, you should check different quotes closely to find out what different insurers cover under their policies. Similarly priced plans from different providers can vary wildly when it comes to actual coverage.
How Much Does Life Insurance for your Child Cost in Canada?
The answer to this question depends on how you are buying life insurance for your child. Are you adding a child term rider to your existing life policy? Or are you buying a stand-alone term or permanent life policy for your child?
The first option is far more affordable. What is more, in most cases, you can convert child riders into permanent coverage when the term expires. However, keep in mind that not all carriers offer these riders. Also, the coverage amounts are usually limited.
If you do not have a life insurance policy or want more coverage than offered by the child term rider, consider taking a stand-alone policy for your child. You can buy a term renewable coverage or a permanent life policy
A term life policy, because it has an expiry date and no investment component, is much cheaper than a comparable permanent life policy. How much cheaper? Generally, a term life policy is 6-12 times more affordable than a whole life policy with the same death benefit.
Apart from the type of coverage, three other factors that affect the cost of child life insurance are:
- Child’s age
- Coverage amount
- When the policy’s premiums will be completely paid
Is Life Insurance for your Child a Good Investment?
Well, it depends on your situation. Permanent life policies include an investment component that grows over time. This is the reason why carriers pitch life insurance for children as a vehicle to secure your kid’s future.
But here is the thing: Life insurance in general is not a great investment. The returns are lower than other traditional investment vehicles. Moreover, insurance companies charge hefty fees. This is usually not the case with other investment options.
Given these reasons, life insurance for newborns is not likely to be the smartest investment for most people. However, if you are a high-earner and looking for an additional investment option, a permanent life policy for your child could work for you.
A life insurance policy for your infant is useful to help cover funeral costs and allow you to take time off work. It could also be used to ensure your child has inexpensive life insurance coverage when they become an adult. And in the case of a whole life policy, the accumulated cash value can be used by your child to help fund college tuition fees, business ventures or everyday expenses. At Dundas Life, we help you find a life insurance policy that meets your financial needs and fits your budget. Contact us today to get the coverage that is right for your family.