Insuring the Next Generation


What types of insurance should you consider for grandchildren?

by Pam Mundell, CFP, CLU, CHS

The primary purpose of life insurance is to protect a young family in the event of the death of a parent who is the income producer and caregiver. As young children are rarely either an income producer or caregiver, the need for life insurance for children seems unnecessary. However, there are certain unique life and critical illness insurance products that also act as an investment and are increasingly popular with grandparents who feel life insurance is important but also wish to provide money to their grandchildren for post-secondary education costs or other purposes.

One option I like is a permanent participating life insurance contract that gives the policyholder (owner) the benefit of annual dividends from the life insurance company.

Consider Bruce and Elaine, grandparents of Kyle, who just turned one in June of 2015. Bruce and Elaine want to put some money aside for Kyle to use for education or perhaps as part of a down payment for a first home. Bruce and Elaine’s daughter, Emma, and son- in-law already have a Registered Education Savings Plan (RESP) set up, and with the addi- tional contributions from Kyle’s other grandparents, the maximum grant money is being allocated to Kyle’s RESP. So Bruce and Elaine are looking at other options; more flexible options than an RESP.

Bruce and Elaine apply for a $50,000 life insurance policy on Kyle’s life with a Canadian life insurance company. There are many options to choose from and they decide on a permanent participating life insurance policy. Bruce and Elaine are the owners of the policy and the life insured is their one-year-old grandson Kyle.The monthly premiums are just over $50 per month and the life insurance company has a current dividend payout of 3.25 per cent. The premiums remain level and will continue until Kyle is 100 years old, but a cash surrender value accumulates over the lifetime of the policy.Once the policy is in force for 21 years and the premiums have been paid for all of those 21 years, there is an accumulated cash surrender value of $12,808 which can be accessed by Kyle. This projection is based on the current dividend scale of 3.25 per cent.The value may be higher or lower depending on the performance of the par portfolio of the life insurance company.

Bruce and Elaine will transfer the ownership of the policy to Kyle, and once he is the owner of the policy, Kyle may choose to cancel the policy and receive the cash surrender value with little tax implications. Kyle may use the money to help pay for his final year of post-secondary education. Or perhaps he’ll use the money when he has a job and needs to move to another city to help cover the extra costs associated with finding a place to live.

Alternatively, Kyle can choose to keep the policy in force and pay the monthly premiums himself. He may access the dividends on deposit within the policy which may have accumulated to $5,748 after 21 years.The policy is considered an exempt life insurance policy and the investment growth in the policy is not taxed to Bruce and Elaine while they were the owners.

Bruce and Elaine also choose to transfer the ownership of the policy to their daughter Emma, and can elect this option in the event either of them die. If Kyle did in fact die, the policy would pay the $50,000 plus accumulated divi- dends to the beneficiary of the policy, which could be Bruce and/or Elaine, or they could name their daughter, Emma,as the beneficiary.

Benefits of critical illness insurance

Another popular option I like and often suggest to par- ents and grandparents is a critical illness insurance policy. Critical illness insurance provides a tax-free lump sum ben- efit payable upon the diagnosis of a critical illness.The lump sum benefit helps a family respond to a critical illness in their own way.You can use the benefit to help with house- hold expenses while a parent, or both parents, take time off work to care for a child. Or possibly extra travel expenses and medical expenses that may not be covered by OHIP or employment plans.

You can purchase critical illness for adults,but policies for children are also a great option.The premiums are much lower for children. Often children are in great health and the return of premium option can provide a lump sum for other purposes.

Bruce and Elaine also have another daughter, Cassidy, who is a single mom with a three-year-old daughter, Ruby. Bruce and Elaine established a RESP for Ruby when she was just a year old and are currently contributing $2,500 per year, which also attracts the full grant available from Human Resources Canada. But they feel they need to do more to help Cassidy and Ruby and wonder if they should also apply for a life insurance policy for Ruby.

I suggest a critical illness insurance policy. They could apply for a $100,000 critical illness insurance policy for Ruby,which is a permanent policy that will remain in force while the premiums are paid and until Ruby is 100 years of age.A critical illness policy will provide a tax-free lump sum payment when the life insured is diagnosed with a critical illness. There are 25 illnesses covered, plus five additional childhood illnesses. A critical illness provides a family with financial help when they need it most. A parent will need to take time off work caring for a child and there most certainly will be extra expenses, such as travel and medical costs. I don’t think many parents or grandparents would want to have to consider medical options and make deci- sions based on money — or lack of money — to pay for the best medical attention.

A $100,000 critical illness policy would cost $64.08 per month for a three-year-old female.This is a permanent policy and the premiums would remain level and would not increase. If Ruby remains healthy and is not diagnosed with a critical illness, then the return of premium option provides a return of 75 per cent of all the premiums paid into the policy once Ruby is 25 years old. When Ruby is 25 years old, the policy would have been in force for 22 years and a total of $17,107.20 in premiums would have been paid by Bruce and Elaine. The return of premium option would pay out $12,830.40, and these funds could be given to Ruby. Ruby may use these funds to travel, perhaps to start out in a new city, or a down payment on a first home. Bruce and Elaine could also choose to transfer the ownership of the policy to Ruby and Ruby could continue to pay the monthly premium and keep the policy in force.This policy provides Ruby with valuable coverage in the event she does suffer from a critical illness. She can choose to cancel the policy once she has reached the age of 40 years and 100 per cent of the premium paid will be returned back to her. However, she will lose the coverage if she chooses to cancel at that time.

There are many excellent options for grandparents to secure life or critical illness insurance for their family. Each option provides a valuable benefit and transfers money from the grandparents into the hands of a grandchild with little or no tax implications. 

(The insurance quotes are current as of July 2015.)

Pam Mundell is a licensed independent investment and financial planner and principal of Pam Mundell Financial Planning Services in Kingston.