The value of insuring children

Selling children’s life insurance is a touchy subject for some advisors while it’s a ‘no brainer’ for others. Just as the “I don’t believe in life insurance” objection usually means that the objector needs to have some myths or misconceptions cleared up about life insurance, the same is true for advisors who find insuring children an unpalatable subject.

Did you know the Income Tax Act’s definition of “children” includes great grandchildren, grandchildren, spouse or common law partner of a child, a child of the person’s common law partner, an adopted child or anyone under age 19 wholly dependent on the person for support?

So other than the obvious reason of the death benefit as a tax free financial safety net for parents in their worst possible time, what are some of the other compelling factors for people to buy life insurance for their “children”?

Wealth accumulation and wealth transfer

Many advisors position participating whole life, limited pay life or a universal life contracts as simply adding another asset class to their client’s wealth accumulation portfolio because the parent as the owner of the life insurance contract on their “child” has complete control over this asset/policy. This ownership gives them the opportunity to transfer and grow some of their wealth in the tax deferred environment of the universal life contract.

Buying insurance on children at very young ages provides them with the highest possible contribution opportunity (usually referred to as over funding) because of the huge gap between the cost of insurance and maximum contribution allowed known as the maximum tax accrual reserve (MTAR). The parent owner can also transfer ownership of these contracts to their life insured child without triggering any tax consequences.

Lock in the rates

The inexpensive rates can be guaranteed for life and the younger the child is, the higher the likelihood they will get preferred or better rates. Because the odds are against a child’s premature death parents often take a long-term perspective and buy substantial amounts of life insurance so that when ownership is transferred the contract’s value has not been largely eroded due to inflation. And if it not a paid up contract they are giving their child the gift of very inexpensive life insurance at very inexpensive rates – for life!

Protect their future insurability

Most of us will cross the line from being insurable to uninsurable. We just don’t know when it will happen. A future insurability option (also known as a guaranteed insurability or renewal provision option) means a child can buy more insurance at standard rates at defined points in time regardless of their health or lifestyle habits at that time or if they are insured under a Term Insurance contract and the ownership transferred to them, they can carry on the existing insurance by simply paying the increased rates when their term insurance policy is renewed.

Protecting the whole family from financial ruin, hardship

The loss of a child can also trigger the loss of one or both parents’ job or income (e.g. commission income) due to emotional incapacitation. The whole family is grieving but proceeds from the deceased’s life insurance policy means that they need not also face the additional nightmare of having no money, or seeing a robust investment portfolio being dismantled and taxed.

Every life licensed advisor’s first responsibility is to make sure Mom and Dad are adequately covered. But remember, if Mom and Dad are covered, they have demonstrated a value for life insurance. They need your help to understand all the benefits associated with the purchase of life insurance on all their “children”.

Helena Smeenk Pritchard has over 36 years of experience in the insurance industry and is the Principal of Helena Smeenk Pritchard & Associates, a leader in “Insurance Know-How” training. Helena publishes a weekly free ‘Did You Know’ newsletter on her site.