Life Insurance Planning for Children in Canada
In one of my earlier articles, I have discussed the pros and cons in getting life insurance for a child.(You could access to that article through: https://samuelconsultant.com/insureyourchild/) Now, let’s go over one of the strategies with a whole life par policy.
Beside universal life insurance, whole life insurance is another type of permanent life coverage. In simple words, the coverage will last for the lifetime of the insured. Some whole life policy would pay out dividend, while others do not. For the ones that do pay out, it is called a whole life ‘par’ policy in the financial industry. There are several key components for whole life par policy, they are the dividend value, cash value and death benefits. Each one of them has the potential to grow together with the child. Let’s explore them one by one:
Growth in Cash Value:
In many permanent life insurance, especially those that can be paid up, there may be cash values built into the policy. Cash value is the amount of money one could get back when the policy is cancelled. The amount will grow as years go by, and it is guaranteed in the policy contract. Another way one could access to this funding is to borrow against it, however, interest expense will be charged and the death benefit will be reduced by the outstanding balance.
Growth in Dividend Value:
Dividend is where the plan becomes more interesting. When an insurance company collects premiums for its whole life par policies, a portion of it will go toward the cost of insurance, claims, and other expenses. The remaining portion will be invested. Some common investments include bonds, stocks, real estates, and others. Then dividend will be paid out to the policy owners accordingly. Due to the well diversified portfolio, many Canadian insurance companies had been able to provide a steady dividend flows to its policy owners. Typically speaking, the higher the death benefit coverage, the more the dividends will be allocated to that policy. Dividend can be received in cash, or can be used to purchase more life insurance.
Growth in Coverage:
When life insurance is set up for a child, many parents question whatever the initial coverage amount will be enough for the child’s family in the future. Inflation will definitely decrease the purchase power of the coverage. Therefore, having a coverage that could grow overtime with the children could be an important consideration. One feature of the whole life par policy is its ability to use the dividend to automatically purchase more life insurance. That is called the Paid-Up addition. Once this is set up at the time of the application, given there is no discontinue to the Paid-Up Addition option, the child can enjoy having the growing coverage without further medical underwriting.
In Part 2, I’ve included a case study of how a parent uses the Canada Life’s whole life par policy to plan for their child.