Youth need living benefits more than life insurance

Life insurance isn’t always necessary for your children, especially if they’re still under 18.

But even if you don’t buy a policy for your kid, a worrywart aunt or uncle might as a gift. Ask your kind relative to start an RESP instead. This way, your child directly benefits from that money (eventually).

If it’s too late to deflect a life-insurance gift, your kid can still cash it out later in life.

Gifts of life insurance

When your children turn 18, they can either convert the policy to five times the amount of coverage or cash out. If you bought them a permanent participating plan, they could cash out the plan upon becoming an adult.

If they’re healthy, we recommend they cash out. They can use the funds to pay for university tuition or buy a first home. Also, since teenagers are usually in a lower tax bracket, they likely won’t owe any taxes on the payout, maximizing the return of this gift. If they don’t need the funds, they could hold the coverage and allow the cash values to compound further for use in the future.

To fill the insurance hole left by a cash-out, you can buy your child a $500,000 renewable-and-convertible-term policy for as little as $25 a month.

If you opt to do this, make sure the term policy is in effect before cashing out the original permanent policy.

Living benefits for young adults

Young adults don’t need life insurance until they have a mortgage or a child. Also, if they’re married and only one partner is working, we recommend a life insurance policy because it protects the non-employed spouse.

Otherwise, living benefits (e.g., disability, critical illness and mortgage insurance) are more important for your children in their 20s. Some offerings combine the different insurance products into one policy, and others return premiums if your child doesn’t contract any life-threatening diseases during the term.

When someone does need life insurance, we recommend Term 10 because it’s cost-effective. Also, life circumstances for young adults often change within five years of purchase, such as having a child or buying a condo.

Disability insurance gets pricier after 30, and even more for anyone in a job where you’re more likely to get hurt, like construction or firefighting.

If your adult children work for a big company, they’ll probably have access to group disability insurance, which usually covers two years off the job. So they might not need more coverage.

If they are self-employed instead, or earn an income but no benefits, they’ll need to fill that gap themselves.

Say your 25-year-old daughter is making more than $25,000 each year. She should consider disability insurance. If she has a degree, her most valuable asset is her future income.

In either case, your grown-up child could get $100,000 in critical-illness coverage with 100% return of premium if no claim is made until age 75. CI is a great fit for young people because many bounce from job to job, and CI isn’t tied to occupation. It also doesn’t get pricier until age 40.

Caroline Hanna is an investment advisor, BA, CIM, National Bank Financial Wealth Management & Dave Pettenuzzo is an insurance advisor, National Bank Financial