Life insurance for children
Coverage started early, explained plainly.
Parents and grandparents often ask whether a policy on a child is worth it. Here is how these policies actually work, what they can and cannot do, and the questions worth asking before starting one.
Why families consider it
Three reasons families start a policy early.
Insurability. A policy bought while a child is young and healthy secures coverage for life, whatever their health becomes later. If a condition appears in their twenties, coverage they already own is unaffected.
Cost at younger ages. Permanent coverage costs less the younger the life insuredThe person whose life the policy covers. The life insured can be someone other than the owner: on a child’s policy the child is the life insured and a parent or grandparent is usually the owner. is when it starts, and on most designs that cost is locked in.
Something that can pass to them. The policy builds cash valueThe amount a permanent policy would pay if it were surrendered, net of any charges. Surrendering a policy or withdrawing value can have tax consequences. over many years, and ownership can later be moved to the child, so what began as a parent’s decision becomes an asset of theirs.
The main purpose is not the death benefit itself. Families start these policies for insurability and for what the policy becomes over a long life.
How it is set up
Who owns it, who is insured, who pays.
The child is the [[life-insured]]. The policy covers their life, and their age and health at the start determine what it costs.
A parent or grandparent is usually the owner. The owner controls the policy: they choose the beneficiary, decide about the cash surrender valueThe amount the owner would receive if the policy were cancelled, after any surrender charges and amounts owing. In the early years it is usually well below the premiums paid, and surrendering can have tax consequences., and can transfer ownership later. A child cannot own a policy until they are an adult.
The owner pays. Premiums come from the owner, not the child, for as long as the chosen payment period lasts.
Name a [[contingent-owner]]. This is the person who becomes the owner if the current owner dies, and it is easy to overlook when the policy is set up.
Whole life
Whole life for a child.
Whole life is the more guaranteed of the two structures. The premium is set at the start, the death benefit is guaranteed, and the policy has a schedule of guaranteed cash values.
[[participating|Participating]] whole life also shares in the insurer’s participating account. It may receive dividendsAmounts an insurer may credit to a participating policy, based on how its participating account performs. They are not guaranteed, can change from year to year, and are different from dividends paid on shares., which are not guaranteed and can change from year to year. Where dividends are credited, a common choice is to use them to buy paid-up additionsSmall amounts of extra permanent coverage that a dividend can buy. Once bought, no further premium is owed on that additional coverage, and it can add to both the death benefit and the cash value., which add to both the coverage and the cash value without further premium on that addition.
Payment periods vary. A policy can be designed to be paid for life, to a set age such as 65, or over a shorter period such as twenty years. A shorter period means higher payments while they last, and none afterwards.
Who it tends to suit. Families who want guarantees, a payment they can plan around, and as little ongoing management as possible.
Universal life
Universal life for a child.
Universal life separates the coverage from the account inside the policy. The owner can vary what they pay, within the limits of the contract and the tax rules, and chooses among the investment options the insurer offers inside the policy.
Cost of insurance, level or increasing. The cost of insuranceThe charge inside a policy for the coverage itself, separate from any amount going to the policy’s account. In universal life it is deducted from the account and can be structured as level or increasing. can be level, designed to stay the same over time, or yearly renewable termOften called YRT. A cost of insurance that starts lower and rises as the life insured gets older, as opposed to a level cost that is designed to stay the same., which starts lower and rises as the child gets older. A lower start can mean materially higher costs in later decades.
Values are not guaranteed. What the policy is worth depends on what was paid in, the cost of insurance charged, and how the chosen investment options perform. Values can fall as well as rise.
Who it tends to suit. Families who want flexibility, are comfortable making investment choices inside a policy, and will review it regularly rather than leave it alone.
Side by side
Whole life and universal life, compared.
Neither is better. They fail in different directions, and the right one depends on what a family wants to manage.
| Feature | Whole life | Universal life |
|---|---|---|
| Guarantees | Premium, death benefit and a schedule of cash values are guaranteed. | Fewer guarantees. Much depends on what is paid in and how the chosen options perform. |
| Premium flexibility | Set premium for the chosen payment period. Predictable, and not adjustable. | Flexible, within the limits of the contract and the tax rules. |
| What drives cash value | The guaranteed schedule, plus any dividendsAmounts an insurer may credit to a participating policy, based on how its participating account performs. They are not guaranteed, can change from year to year, and are different from dividends paid on shares., which are not guaranteed. | Deposits, the cost of insuranceThe charge inside a policy for the coverage itself, separate from any amount going to the policy’s account. In universal life it is deducted from the account and can be structured as level or increasing. charged, and the performance of the chosen investment options. |
| Complexity | Lower. Most decisions are made once, at the start. | Higher. More choices at the start, and more of them later. |
| Ongoing attention | Occasional review. | Regular review, so that costs and funding stay on track. |
| Who it tends to suit | Families who value guarantees and simplicity. | Families who want flexibility and are comfortable being involved. |
A starting point
Whole life or universal life?
Four questions about how you would rather hold something for the long term. Nothing is stored or sent, and the answer is a place to start a conversation, not a recommendation.
Question 1 of 4
How much do guarantees matter to you?
Question 2 of 4
Would you rather a set payment, or the ability to vary it?
Question 3 of 4
How do you feel about choosing investment options inside the policy?
Question 4 of 4
How involved do you want to be over the years?
Result
This is not a recommendation, and it is not advice about your situation. Which structure suits a family depends on circumstances we would need to discuss.
This is not a recommendation, and it is not advice about your situation. Which structure suits a family depends on circumstances we would need to discuss.
Ownership later
Transferring the policy to the child.
When the child is an adult, the owner may be able to transfer ownership of the policy to them on a tax-deferred basis, if the conditions in the tax rules are met.
Timing is a judgement call rather than a formality. Once the child owns the policy, they control it: they can change the beneficiary, and they can take the cash value out, with whatever tax consequences follow.
Naming a contingent ownerThe person named to become the owner of a policy if the current owner dies. Naming one can keep ownership from passing through the estate. means ownership can pass directly to the person you choose if the owner dies first, rather than through the estate.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Tax, in plain terms
How these policies are taxed.
Growth inside an exempt policyA life insurance policy that meets the tests in the tax rules for exempt status. Growth inside an exempt policy is generally not taxed each year, as long as it keeps that status. is generally not taxed each year, as long as the policy keeps its exempt status.
The death benefit is generally received free of income tax by the named beneficiary.
Withdrawals, policy loans and a surrender can be taxable above certain amounts, depending on the policy’s adjusted cost baseThe tax cost of an asset, generally what was paid for it plus certain adjustments. A capital gain is measured against it. A life insurance policy has its own adjusted cost basis, calculated under separate rules.. This is the part families are most often surprised by, because the money is not simply theirs to take.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Worth asking about
Features that matter more than the headline.
[[guaranteed-insurability-option|Guaranteed insurability options]]. These let the child buy more coverage at set points in adult life without new medical evidence, subject to the terms of the policy. For a policy meant to last a lifetime, this is often the most valuable feature in it.
Premium waiver. Some designs continue the policy if the paying owner dies or becomes disabled, so the coverage does not depend on the parent being able to keep paying.
A children’s term rider. Added to a parent’s own policy, this covers the children for a lower cost. For families who want basic coverage rather than something permanent, it is often the more sensible answer, and we will say so.
Honestly
What to weigh before starting one.
It is a long commitment. These policies are designed to run for decades. They reward being left alone and punish being started and stopped.
Early surrender usually returns less than was paid in. Cash values build slowly at first, so a policy cancelled in its early years can come back worth less than the premiums that went into it.
It is not an RESP. For education, a registered education savings plan is the purpose-built tool, with its own grant. A policy is not a substitute for one.
The parents’ own coverage comes first. If the people the child depends on are underinsured, that is the gap to close before insuring the child. We would rather tell you that than sell you this.
With universal life, the outcome depends on choices. Flexible premiums and investment options mean the result depends on decisions made over many years, and on markets.
Planning across generations
Where a child’s policy fits in a larger plan.
For families already planning across generations, a policy on a child or grandchild is usually a small part of a larger structure, not a strategy on its own.
A grandparent can own and pay for a policy on a grandchild, and ownership may later be transferred to the parent or to the child, subject to the tax rules.
A policy is directed by its ownership and beneficiary designations rather than by the will alone, so it should be reviewed alongside the rest of the estate plan. Where a trust or a corporation is involved, the ownership question becomes more complex, and is settled with your accountant and lawyer before anything is put in place.
These strategies are complex and are implemented with your accountant and lawyer. This is general education, not tax or legal advice.
Questions
Common questions
What age can a child be insured from?
Insurers generally issue coverage on a child from a few weeks old up to the late teens, with the exact ages depending on the company and the product. The child must be healthy enough to qualify at the time.
Is coverage for a child a good idea if we do not have our own coverage yet?
Usually not yet. If the people a child depends on are underinsured, that gap matters more than the child’s policy. We would look at the parents’ coverage first and come back to this afterwards.
Can a grandparent own the policy?
Yes. A grandparent can own and pay for a policy on a grandchild. It is worth agreeing early who the contingent ownerThe person named to become the owner of a policy if the current owner dies. Naming one can keep ownership from passing through the estate. will be, and whether ownership is eventually meant to reach the parent or the child.
What happens to the policy if the owner dies?
If a contingent ownerThe person named to become the owner of a policy if the current owner dies. Naming one can keep ownership from passing through the estate. was named, ownership passes to that person. If the owner dies and no contingent owner was named, ownership generally passes through the owner’s estate, which can mean probate and delay.
Can the child access the cash value?
Not while someone else owns the policy: the owner controls it. Once ownership has been transferred to the child, they control the policy, and any withdrawal or loan is taxed in their hands under the usual rules.
What if we stop paying?
It depends on the design and on how long the policy has been in force. Stopping payments can reduce the coverage or end the policy, and a surrender can create a taxable amount. This is why the payment period is worth choosing carefully at the start.
Begin
The best time to plan is while every option is still open.
A first conversation is private and carries no obligation. We will listen, ask careful questions and tell you plainly what we see.
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