The Ultimate Guide To Life Insurance For Kids In Canada

When you have a baby, life insurance for kids is the furthest thing from your mind. Getting to know your baby, managing daily care and planning for their future takes top priority. But whether your child is an infant, school-age or an adolescent, you can use children’s life insurance to help set them up for the future.

There are some misconceptions about life insurance for kids. Life insurance for kids might sound like an unnecessary product at best or questionable at worst. Collecting proceeds from a policy if your child passes away may seem wrong. However, it’s essential to understand what life insurance for kids is, why it could be beneficial and when it might not be worthwhile. 

What is Life Insurance for Kids?

Life insurance for kids is a policy that insures the life of your child. There is a benefit amount payable if your child passes away. Benefits amounts vary, and so does the cost. The specifics of a policy will differ from company to company, so you must read the fine print. Ask your agent or broker questions to know the details of your policy.

There are two types of life insurance for kids. You can get a standalone term insurance policy or purchase a permanent policy.

Term insurance for kids

Term insurance is coverage you purchase for a specific term, such as one year, five years, twenty years or more. Once the term expires, you can choose not to renew the policy or to renew the policy. Typically, you don’t require a medical exam at renewal time, but your premium will be higher.

Term life insurance for kids will remain in force until the term expires. That can be when the child reaches the age of 18, 22, or 25. You’ll be able to confirm the term by checking the policy. Getting one with a convertible option can be a good idea when purchasing a term insurance policy. This option allows you to convert the child’s life insurance policy to another policy with no medical exam when it expires. Not needing a medical exam can be advantageous if your child develops health issues before adulthood.

Since term life insurance policies only provide a death benefit, they’re usually pretty cost-effective. However, you don’t get any additional benefits from a term policy as you do with a permanent policy.

Permanent life insurance for kids

Permanent life insurance is a life-long policy. Two types of permanent life insurance are universal life insurance and whole life insurance. You can get universal or whole life insurance for kids and adults. An agent or broker can explain the differences between the two types of permanent insurance.

Permanent life insurance offers a death benefit, cash savings and investment options. Extra funds in the policy grow on a tax-deferred basis. In many cases, you will pay premiums for a period of time, such as 20 years, and then the policy is paid up. 

You can withdraw the excess amount or, in some cases, use the policy’s cash surrender value as security for a line of credit or loan. Sometimes, people withdraw the available funds to buy their child a car or pay for tuition or other expenses.

There are several advantages of a permanent policy. Since they’re permanent, you don’t need to worry about them expiring or having to renew them. They have a cash component you can access if you need or want to. You can also use a permanent policy for collateral if you borrow.

Of course, all of this comes with a cost. Permanent life insurance policies are more expensive than term life policies. Additionally, the rates or return on your investments may not be as good as those you can earn elsewhere, such as in your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) and Registered Education Savings Plan (RESP). Finally, these plans charge administration fees which you could avoid by investing elsewhere.

Who can buy child life insurance?

Parents or legal guardians can buy life insurance for their children regardless of the policy type. For example, suppose the parent has a term life insurance policy. In that case, they can add a rider to their life insurance policy for their child. If that option isn’t available, they can purchase it as a standalone term policy.

Parents or legal guardians can enrol their child in a permanent life insurance policy instead of adding a rider to their policy or getting a standalone term policy. Grandparents can also purchase a permanent life insurance policy for their grandchild.

Age limits for life insurance for kids

Most policies allow you to enroll your child in a life insurance policy when your baby is 15 days old. You can register your child in a children’s life insurance policy until they are 17.

Suppose your child’s life insurance is a rider you added to your policies. In that case, it is usually in effect until the child reaches the age of 22 or 25 or gets married. Each policy is different, which is why it’s so important to check the details. Your policy may offer the option of converting it to a new term or a permanent life insurance policy.

Standalone term life insurance policies for kids will be in effect until the term expires. At that time, you can let the policy expire. However, you may want to keep a life insurance policy in place. In that case, you can renew it without a medical or convert it to a permanent life insurance policy.

Permanent life insurance policies are for life. They typically stay in force as long as you pay your premiums and don’t cancel the policy.

Benefit amounts of child life insurance policies

Your benefit limit for a life insurance policy for your child won’t be as high as the limit for an adult policy. Adults get life insurance for many reasons, including replacing their income if they pass away so their families won’t be left to struggle. The policy’s purpose may be to replace income, pay off debt, cover taxes on an estate, or leave a legacy.

Children don’t have the responsibilities and obligations adults have, so the benefit amount on life insurance for kids is less. Different companies offer different amounts of life insurance. The minimum amount for a standalone term life insurance policy for kids usually is $5,000. You can increase it in $5,000 increments up to a maximum amount. Some companies have a maximum benefit amount of $20,000, while others offer limits of $30,000.

How much does life insurance for kids cost?

Prices, like policies, will vary between companies. For example, in Canada, the price per $10,000 worth of life insurance for kids generally ranges from $3-$6 per month. So your premiums for a $20,000 policy will be about $6-$12 per month. 

If you have a life insurance policy, your provider may offer a limited amount of child life insurance at no cost. Ask your agent or broker if your life insurance company offers this benefit.

A permanent life insurance policy offers benefits that term insurance does not, resulting in higher premiums. For example, a whole-life policy for a 5-year-old child can cost more than $65 per month.

How to buy life insurance for kids

How you buy life insurance for your child depends on the type of policy you want. If you have a life insurance policy for yourself and want to add a rider to the policy for your child, your agent or broker can do this for you. This is called a Child Term Rider. In addition, you may be able to purchase a children’s policy over the phone or online.

Your premium will be included in the cost of your policy. One rider normally covers your child and all future children. In addition, no health exam is required, but the insurer may ask some standard health-related questions.

Permanent insurance policies are more expensive and have more features than term policies. 

An insurance agent or broker can explain the details so you can decide if a permanent policy is the right choice for you.

You can also purchase standalone term insurance for your child. Insurance companies and banks offer these policies. But, again, it’s best to do your research and compare various life insurance policies to make sure you get the right policy at the right price.

Why Buy Life Insurance for Kids?

Losing your child is an unthinkable tragedy. Unfortunately, it happens sometimes. Canada’s current infant mortality rate is 3.943 deaths per thousand. While our infant mortality rate has been trending downward, almost four out of every 1000 children will not live past their first birthday.

As a result, there are several reasons to consider life insurance for your child or children. Life insurance for children may also provide some benefits you want when your child reaches adulthood.

Benefits of life insurance for kids

A children’s life insurance policy can offer several benefits depending on the policy you choose.

Four main benefits are funeral expenses, time to grieve, money to cover medical expenses, and the option to convert the policy when your child becomes an adult.

Funeral expenses

Funerals are expensive, and you may not have the money to cover the costs. Life insurance for kids is usually enough to cover the funeral expense. Not worrying about where the money will come from to pay for funeral expenses can be a relief when you’re grieving such a terrible loss.

Time to grieve

Proceeds from a life insurance policy can provide you with extra funds so you can take time off work to grieve. You can use the funds to pay for counselling or other resources to help you cope with the loss of your child.

Insurance for adulthood

Your child could develop an illness or health issue preventing them from getting life insurance when they are older. Some term policies allow you to convert the policy to another life insurance policy without a medical check when your child reaches the maximum age. The option to convert a term policy virtually guarantees your child will qualify for life insurance when they become adults.

Permanent life insurance is in place for the lifetime of the insured. As a result, your child will have a policy for life if you purchase permanent life insurance.

Your Children’s Financial Future

Permanent life insurance for kids in Canada presents a multifaceted savings instrument, designed to support future significant expenses. This type of policy can facilitate key life milestones such as funding higher education, acquiring a home, or even ensuring a comfortable retirement. The investment component of a whole life policy offers the advantage of many years of growth potential, and with the growth being tax-deferred, the accumulated value could become substantial by the time it’s needed.

The insured child, once grown, has an array of choices regarding the policy. They might choose to take out a policy loan, use the policy as collateral for other loans, or decide to surrender the policy altogether. Alternatively, they might let the value continue to accumulate like a regular savings account and eventually pass it on to their own offspring or other beneficiaries.

Moreover, some whole life policies offer a limited pay option, where the policyholder can pay off the entire coverage within a condensed timeframe. This ensures lifetime coverage for your kids with no further premiums, providing long-term security with short-term financial commitment. This approach offers your child an enduring legacy and a financial head start in life.

Is Life Insurance for Kids Worth it?

Whether life insurance for your kid is worth it will depend on your circumstances and what you want to accomplish. For example, a term policy is not expensive and can cover the cost of a funeral if something unthinkable happens. On the other hand, statistics suggest that experiencing the loss of a child is uncommon, so children’s life insurance may not be a priority.

If you have all your bills under control and have maximized all your other investment options like your RRSP, TFSA, and RESP, life insurance for your kid could give them some advantages later on, depending on the policy you choose. Knowing your financial goals will help you decide if a children’s life insurance policy is worthwhile.