Life insurance for kids: Do you really need it?

We’re not just talking about planning their first birthday party or saving up for school with a registered education savings plan, either. It may be uncomfortable to think about, but it’s worth considering life insurance as a way to prepare for even the worst what-ifs. 

“Life insurance is about the people who are left behind,” explains Lorne Marr, director of business development at Hub Financial and founder of LSM Insurance. “You have to think of it as a financial instrument that will give you time to grieve. You don’t want to have to rush right back to work if a child passes away.”

A life insurance policy for kids isn’t only about the end of life, either. The right plan can have lifelong advantages. So, tuck the youngsters in for a nap and settle in as we break down everything you need to know about buying life insurance for kids. And while you’re at it, brush up on getting the best life insurance for yourself, too.

Do I need life insurance for my kids?

Aside from financially preparing for the possibility of an untimely death, life insurance can help protect and secure your children’s health and finances throughout their lives.

Term life insurance policies are affordable and provide coverage in the form of a death benefit for a set number of years, while permanent life insurance policies (i.e. whole life insurance and universal life insurance) cost more but offer lifelong coverage, as well as a few other benefits. With permanent life insurance policies, which build cash value and typically come with investment options, you may be able to grow an extra nest egg that can help pay for university or a down payment on a home; however, due to their high costs and low rates of return, these policies are typically best suited for high-net-worth individuals who have already maxed out their TFSAs and RRSPs.

Then there’s your children’s future to think about. One of the biggest advantages to insuring your child is that policies can be converted later in life, usually without a medical exam. And even though life insurance premiums increase with age, insuring your child early (or throughout their entire life) can generate savings in their adult years.

“A child may be healthy today, but they might develop diabetes, autism or colitis, which will make getting insurance for them very challenging as adults,” adds Marr. If you lock them into a policy now, they can often convert it into a policy as an adult that’s guaranteed without a medical exam. This feature means their premiums will likely be based on their healthier, younger selves, and will be more affordable than if they applied on their own. Marr says this option depends on the insurance carrier, so ask if it’s available first. 

Who doesn’t need life insurance for their child?  

At the end of the day, buying insurance is a personal choice. As important as it is to consider the potential costs of a funeral or of a leave of absence from work to grieve, Marr says it doesn’t make sense to overspend on life insurance for your child. He suggests budgeting for your own coverage first—as well as paying off credit cards and lines of credit—before taking on this extra expense. “Have your financial house in good order, and then you can start paying for life insurance for your child,” he says.

The pros and cons of the policies available for children

Not sure what to make of the life insurance options available for children? Here’s a quick rundown of the different policies and their costs.

Term life insurance

Term life insurance provides coverage for a set period of time (called a term). The period can last either a fixed number of years, such as 10 or 15 years, or up to a specified age, like 25. Term life insurance policies are generally less expensive than permanent life insurance, but they do not accumulate a cash value.

In Canada, there are two ways to obtain term life insurance for little ones. You can either purchase a child term rider, which is an add-on to your own policy (meaning you’ll have to be insured first), or you can buy standalone coverage specifically for your child. Standalone coverage can typically be converted into a permanent policy later in life.

Premiums: As low as $3 per month.

Pros: This is the most cost-effective way to get started, and many policies cover multiple children at once for a low premium.

Cons: The death benefit is limited, generally capping at around $35,000 per child. And the lowest premiums are likely to offer only $10,000 worth of coverage.

Insurance shopping tip: Look into a convertible policy, which transitions when your child is an adult into more valuable permanent coverage—with no medical exam required. For example, you could pay $3 per month for $10,000 of coverage and, when your child turns 25, convert it into a standalone policy with $250,000 in coverage.

Permanent life insurance

Permanent life insurance policies offer coverage for the entirety of the insured person’s life. It typically comes with a cash value that can be invested, borrowed and/or used to pay for future premiums. Whole life insurance and universal life insurance fall within this category. Finally, with this type of insurance, it’s possible to get a participating policy, meaning one that receives dividends that can accumulate interest or be used to purchase additional insurance. Non-participating policies do not receive dividends.

Premiums: $50 a month or more, depending on how much cash value you hope to accumulate.

Pros: Your child receives coverage for life, as long as premiums are paid. With term life and whole life insurance, the death benefit is fixed. But with universal life insurance, the death benefit and cash value can change based on how much you choose to pay in premiums and how your investments perform. The cash value and dividends earned can be accessed to help pay for major costs (think tuition or a first home) or used as collateral for a loan. 

Cons: Premiums are generally more expensive than with term life insurance, and you’ll be paying over a greater number of years. Investment growth in the account is comparable to the incremental gains of a guaranteed investment certificate (GIC), so manage your expectations.

Insurance shopping tip: A parent owns a child’s policy, so be sure to transfer ownership of the policy to your child as soon as they’re old enough (think early 20s). This will help to avoid tax implications from holding onto it too long and letting its cash value accrue—that’s when the Canada Revenue Agency (CRA) will want a closer look.  

When should I buy a policy for a child?

Some policies can take effect when a child turns just 15 days old. That may seem unduly early, but consider that the infant mortality rate in Canada (for babies under 1 year of age) is around 0.5%—equivalent to the mortality rate of people aged 55 to 60, who are far more likely to have life insurance.

And insuring your kids when they are young can have financial benefits. For one, depending on the type of insurance, you’ll have more years to grow the policy’s cash value and collect dividends (if you have a participating policy). “If your child is already a teen, you can still buy insurance,” says Marr, “[but it] will likely be a smaller policy, with less time to accumulate growth.”

With term life insurance, premiums increase as you age, with costs jumping at the time of renewal. With whole life insurance, however, the costs remain consistent. This can reduce your child’s premiums later in life—though it does require paying premiums for a greater number of years.

How to buy life insurance for a child

If you decide to get life insurance for your child or children, you’ll have to share certain information with the insurance provider. To make the process as hassle-free as possible, have these essentials on hand for your insurance broker, agent or provider. They may ask for any or all this information during the application and/or quoting process:

A budget: Whether it’s $10 or $50 a month, know what you can afford to spend and stay within your budget.

Proof of identity: Have IDs for both you and your child, such as a social insurance number, birth certificate or passport.

Proof of income: A pay stub or a letter of employment will work.

Proof of address: You can use a signed lease or a letter from your landlord if you’re renting, while homeowners can provide a mortgage bill or a property tax statement.

Final thoughts

Buying life insurance for your child or children may not make sense for everyone. Some parents may need to prioritize other financial goals, such as building an education fund, saving for retirement or paying off high-interest debt—to say nothing of simply covering the daily costs of child rearing today. And you should always have adequate life insurance for yourself, before considering coverage for your children, too.

However, children’s life insurance can be the right option for families who can afford the added expense. It can protect you financially from the unthinkable, provide wealth-building opportunities and even make maintaining life insurance easier for your children as they age.

More on life insurance:

• Do I really need life insurance?

• How much does life insurance cost in Canada?
• Which type of life insurance is best

• Life insurance vs. mortgage insurance: Let’s break it down