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Life insurance for children

Why should you purchase life insurance for your children? First, and perhaps most importantly is to guarantee future insurability. By locking in life insurance coverage when they’re a child, you guarantee that they have that coverage when they’re older no matter what happens to their health. My own children are a good example, my eldest had a brush with cancer in their early 20’s and now the $250,000 insurance policy I purchased on them when they were younger is the only life insurance readily available to them.

Secondly, parents often purchase life insurance on their children as a financial planning suggestion, or a gift. This was why I purchased life insurance on my kids – I wanted to show them the value. And frankly at the low premiums it was better than another XBOX game.

You’ll need to determine the amount of coverage first. Generally smaller amounts such as $25,000 or $50,000 are common. However if you’re purchasing insurance to guarantee future insurability you may want to consider a larger amount – enough to look after them if they do become uninsurable. Again relating this back to my personal situation, I purchased $250,000 as I figured it was enough to cover a small mortgage when they got married and bought a house. Ultimately there’s not a lot of science or math around figuring the amount so most people go with a number that they’re comfortable with.

There’s a variety of common types of life insurance used with children.

  • Term insurance is available from some specific companies in Canada, but rarely used unless you’re covering a student loan when they’re older. When guaranteeing future insurability or as a gift most people are seeking permanent lifetime coverage which term insurance is not.
  • Quick pay, par whole life. This is a common policy type with children and one you should investigate fully. Whole life insurance lasts a lifetime, but the ‘quick pay’ type has premiums that are paid up generally in 20 years (so by the time you gift the policy, there’s no more premiums). The ‘par’ part is important because it allows your child’s coverage to grow over time without any medical. Par or participating whole life can be selected with an option called Paid Up Additions. Paid up additions mean the life insurance coverage grows yearly. So if your child becomes uninsurable this feature lets them get a bit more life insurance without a medical exam.
  • Term 100 or Guaranteed Universal Life. These policies, when paying the minimum premium, provide level life insurance coverage and level guaranteed premiums for life. This is the type of insurance I purchased, but it is not common. My constraints were that I wanted the least expensive policy with no bells and whistles, and I purchased enough that I didn’t feel that an increasing coverage amount was necessary. So, this type is a consideration but is the bare bones version and not common.
  • Universal Life. A typical universal life policy will have an investment component. I am not a fan of these policies as they are not guaranteed – and over long timeframes things can go very bad; the policy can become unaffordable or implode. Those downsides are incompatible with the intention of guaranteeing future insurability and providing a lifetime gift. Kind of sucks if you gift a policy to your kids and when they turn 50 they find out that the policy they thought had no more premiums instead is asking for large and increasing premiums going forward.

There are other options, but they are less common. For most people looking for an off the shelf solution, you should discuss a ‘quick pay par whole life’ policy with paid up additions.