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Life Insurance for Children
Life Insurance for children is a bit of a controversial subject. The problem I believe is that some parents of children feel bad about thinking that something like that could happen to their child. As a parent myself, I can surely sympathize with them.
The question perhaps is not whether children should have life insurance, but rather how much life insurance should a parent buy on the kids. What are the options in Canada for children’s life insurance?
There are 3 things that I have seen life insurance brokers do for kid’s life insurance:
1. A Child Rider – This is an amount of insurance (usually a small amount such as 10,000-25,000 dollars), that is added on to one of the parents life insurance policies. This would be a very in-expensive way to insure a child. This option is very attractive for parents that have two or more kids, because the life insurance company charges one price that covers all your children. So you pay the same low premiums whether you have 1 or 10 kids.
The drawback is that the amounts are usually limited to 25,000 and it is a term rider, which means that eventually it will expire, age 21 with most life insurers. The good news is that most life insurance companies will let the child convert his child rider into a standalone life insurance policy, without evidence of insurability. All that means is that the child is guaranteed to be able to have life insurance even after the child rider expires, even if their health wouldn’t otherwise allow them to buy a new policy.
2. A Whole Life or Universal Life Insurance Policy – unlike a child rider, this is an actual policy on the child’s life, and it does not expire at any age (therefore the term “Whole Life”). I would say that this would be the life insurance agent’s favourite policy to sell, because of the higher commissions paid put on Whole life type of policies.
Is it good for the client? I am not sure, there reason I don’t like it as much is, those kinds of policies are more expensive. They do promise a cash surrender value, and many a parent bought this policy on their kid, and thought that the cash value would be high enough put them through college. Off course that isn’t going to happen, the cash values on a typical child Whole Life insurance policy is 2-$3000 after 18 years of paying into it, so it isn’t going to get the child very far. Besides, you would need to cancel the policy in order to cash in, so that defeats the purpose of a permanent policy altogether.
3. A Term Life Insurance Policy – Well, I have not seen a lot of term insurance policies on children in my 20 years in the life insurance business. In fact, I’m pretty sure that me and my friend Brian Cowper are the only ones that sell that kind of policy to kids.
Here is why I like that approach; first, it is very cheap, a 2 year old can get a 250,000 20 year term policy for under $12 per month. It is their own policy, which they can take over one day when they are old enough, and at the same time, should anything happen to the child, the payout is so much higher than a measly 10 or 25000 child rider.
Why would a parent need such a high amount of insurance? Well, a parent probably doesn’t need it, but... because it’s so cheap, it is just better to do that, for the child’s future. Another way to look at it, and I have seen situation where this would have applied, no matter how painful the thought, should a child die prematurely, I’m sure you will agree that it would put tremendous stress on the family. Part of this stress is financial, because as a parent, to take time of work to grieve for some time would not be an option, if it wasn’t for the life insurance proceeds.
So to summarize this controversial topic, in my opinion, either you don’t buy any life insurance on your child, or buy a large term policy.
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