As I become a father myself, I’m more active in assisting young families to save for their children’s future. In addition to the Registered Education Savings Plan (RESP), another strategy I always share with parents is to save within a life insurance policy. (If you’re unaware of this method, you may refer to my previous post on Life Insurance in Canada that Grows with your Child.)
Recently, I visited a family which I know them for many years. They have a very cute 2 years old boy, we went through different options in savings for his future. During our conservation, they raised up an interesting question: “Rather than saving within a life insurance policy for my son, would it be more beneficial to save within a TFSA?”
Although I provide services in both areas, I personally prefer savings within a life insurance policy for long term planning. Here are my reasons:
Savings Within A TFSA Does Not Amplify The Estate Values:
- The idea of insurance protection is that you budget with an affordable premium amount, while the insurance company will provide an adequate coverage for you. For example, a universal life policy that is guaranteed to be paid up in 10 years of coverage $200,000 for a newborn girl is only $70.92 per month. If you deposit the same $70.92 per month for 10 years into a TFSA, assume an average annual return of 3% per year, it would take over 100 years to accumulate to $200,000!Unless there are other financial arrangement, the child’s family in the future will be under-insured for a significant lengthy period of time.
- (Note: Quotation is made from Canada Life on March 18th, 2014 and may be subjected to changes)
Funding Can Also Be Accessed Beside Death
- There’s always a misconception that the child could only access to the funding upon death. The truth is many permanent policies nowadays do offer cash value or even dividend value. Although there are terms and conditions upon withdrawal, they will still be available should the child need to use it.
You Could Always Deposit Into Your Child’s TFSA in the future, But Not Necessarily For Life Insurance.
- When you see a TV, laptop, purse, shoes, cell phone, you may purchase it anytime given it is within your budget. However, life insurance is unlike other products where you could purchase it anytime you’re ready. It needs to be medically underwritten. There could be chances that the policy could be rated or even declined due to medical history. Not to mention, the medical history of the parents and siblings would also affect the child’s application. Furthermore, your child cannot open a TFSA before age 18. Before that, you will need to use your own TFSA contribution room for that.
If Not Now, When?
- Do you anticipate your child will eventually have their own family, and have the life insurance needs just like you today? Then why would you wait until they grow up and pay higher premium for the same coverage amount?
We have cover the pros of using life insurance for your child, so what are the pros of using TFSA? I would say there could be potential taxation advantage when funds are withdraw. TFSA is more flexible in the sense that you may adjust or even terminate the contribution without any costs. As for life insurance, you must commit to the scheduled premiums to avoid lapsing the policy. It also takes time for the cash value to build up within the policy, therefore, TFSA could be a great tool if the parents expect to use the savings in a short run.
To help you better understand this concept, here’s an example from Canada Life that compares the two strategies. (Juvenile Life Insurance Growth Strategy vs TFSA)
Of course, one size doesn’t fit all. Different strategies will be suitable to different families according to their needs and goals. In addition to RESP and life insurance policy, what are some other methods you would save for your child? I’d love to hear from you, please share your view.
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