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The Pros and Cons of Insuring your Children





This is a guest post by Promod Sharma, an Actuary based out of Toronto, ON.

You (probably) love your children and want the best for them. Does being a good parent mean insuring them too? We’ll look primarily at life insurance and critical illness insurance from the perspective of an actuary. There’s also a nifty solution below that gets overlooked.

Life Insurance

Insurance provides cash (generally tax-free) when a significant, unpredictable financial loss occurs. What financial loss does a family suffer if a child dies? Not much — unless the child is a major source of income (e.g., child star). The real loss — the devastating loss — is emotional. Money cannot compensate for the loss of someone you love.

As a parent, would you want to profit or breakeven? “Yeah, my kid died but the insurance covered the funeral and we upgraded our home theatre. Just wish we bought more.”

Having children is definitely worthwhile but expensive — easily hundreds of thousands of dollars. There are actual costs like daycare and saving for their education. There are also big opportunity costs because you have less time to do other things like sleep and upgrade your skills. My wife stayed home 9 years in total.

A child’s death is heartbreaking but eliminates future expenses. While grieving, the parents may earn less or need to borrow but that’s temporary.

We don’t like to contemplate our own deaths. Try getting a parent to think about the death of a child. That takes sales skills.

Critical Illness Insurance

Like you, your child can suffer a devastating disease at any time. You pay, in time, when you take your child to the doctor or visit them in the hospital. You pay in money if you take time off or hire someone to look after them. The biggest cost is the immeasurable mental anguish.

Canada has lengthy waiting times for treatment, even in hospital emergency wings. What if your child could get treated tomorrow in the US? All you need is money. Critical illness insurance provides a lump sum for you to use anyway you want. You reduce the need to deplete your savings or add non deductible debt.

Critical illness insurance for children is relatively rare but available from several insurers. Plans often cover child-specific diseases like cerebral palsy, cystic fibrosis and muscular dystrophy. There may be add-ons that let you get your premiums back if there’s no claim. For example, there’s Sun Critical Illness Insurance (no endorsement implied). If you’re interested, talk to an independent advisor with access to other companies rather than anyone listed on their site.

Common Pitches

Advisors use compelling techniques to convince you to buy. We’ll look at two.

1. Future Insurability

What if your child doesn’t qualify for insurance as an adult? Getting coverage now is a way to set them up for life. Perhaps, but how much insurance are you buying? Says it’s $100,000. What will that be worth after inflation? If the amount is small — say $10,000 — what is that worth even today?

If your young adult works for a company with employee benefits, they may automatically get group life insurance for 1-2x their annual salary without underwriting. If they leave, they likely have an option to convert that amount to personal coverage without underwriting. If they’re self-employed, they may be able to get insurance through the local Board of Trade or Chamber of Commerce. If they belong to an association (e.g., university alumni), they might get coverage there.

2. “Pennies a Day”

Coverage on a child may only cost pennies, nickels, dimes or quarters a day. Anyone can afford that. By extension, buy a daily coffee. Eat out. Buy, buy, buy. Each purchase is small but the total adds up unless you’re vigilant with each expense.

An Overlooked Option

If you do want insurance on your child, consider a student accident plan with 24/7/365 coverage. That’s what my parents bought when I was in primary school. Maybe yours did too. The InsureMyKids Platinum Plan costs $31/year. Industrial Alliance offers the Kids Plus Active Plan for $32/year. Both include a $20,000 death benefit among the protection.

But First

If you really want to protect your children, make sure that you and your spouse are properly insured for disability (income replacement insurance), morbidity (medical expense reimbursement, critical illness insurance) and mortality (life insurance).

As for your children, how about investing in an RESP?

Links

About the Author: Promod Sharma (LinkedIn) is a Toronto-based actuary who designed life and health insurance products, and watched advisors sell them. He uses those insider insights to help the wary and weary get the right protection. He’s been writing the Riscario Insider blog since 2007.





10 Comments, Comment or Ping

  1. 1. Goldberg

    This is a great article. Better than the quality of the previous month.

    I’ll look at the “overlooked option.” Rather cheap.

    However, another overlooked option is self-insurance consisting of a strategy of maxing RESP, maxing both parents’ TFSA, having no non-deductible debt, and paying down the mortgage. This should easily create a $100,000+ room of cash and debt within a few years.

  2. The readers will love this article I’m sure, because it plays to their emotions.

    >>As a parent, would you want to profit or breakeven? “
    >>>Try getting a parent to think about the death of a child. That takes sales skills.

    Those are both sales tactics intended to invoke emotions. I’ve commented before on Promod’s tendency to paint the industry in a negative light. It’s worth noting that while he advertises himself in this article as an actuary, I believe he’s actually an insurance advisor. And one that should be familiar with utility theory.

    But what’s truly bizarre about this article is that while purporting to talk the numbers on life insurance, he then does exactly the opposite for critical illness insurance.

    >>What if your child could get treated tomorrow in the US? All you need is money.

    My child needs to get treated in the U.S.? That’s an emotional sales job right there. The ‘U.S. treatment’ thing is something sold by the insurance industry right after they finish talking about ‘one last trip to disney world before you die’.

    If you’re going to pretend to have a financial conversation about insurance, then an insurance purchase is to cover the loss of something, not the creation of wealth. Getting U.S. treatment is creation of wealth, not a loss and therefore puts it firmly into the genre of a lottery not insurance.

    >>>The biggest cost is the immeasurable mental anguish.
    C’mon. Really? That’s EXACTLY how critical illness gets ‘sold’ by the industry. It’s the feel good lottery.

  3. 3. SST

    Dont worry, LIC.com, the regulatory agencies are exceptionally proficient at terminating this kind of behaviour from the financial industry. ;)

  4. Very interesting post. Insurance is never black and white. There’s always pros and cons to every side. When there are so many things to invest in (RRSP, RESP, insurance), it can be overwhelming when you have limited resources as a parent.

  5. Nice viewpoint on the pros and cons of children insurance. We have been thinking about it and weighing both sides. Besides, there are three kids that we have to pay for, in case we decide for it.

  6. Cherleen, it’s a personal decision not a financial decision. So the decision you should be weighing is whether you ‘want’ insurance for your children – a financial plan will simply tell you not to (which is fine as well).

    If you are looking for insurance on kids, the exact opposite of the article is what I would suggest – Life insurance first, and critical illness either not at all or a distant second. At least with life insurance it’ll become useful at some point for them, even if it’s not that way right now.

    One option that wasn’t offered in the article for life insurance was a children’s protection rider. Typically when an adult purchases a policy they can add their children as a rider for a small amount of coverage, at a very low cost (some companies will cover all kids for $10k for $5/month total). Then when they become adults they can carve off their own policy from the rider, at some multiple of the $10k (typically 5X).

    Some of the undercurrent of backlash around insuring kids is from the sales strategies that are used to yank emotions or treat it like a financial decision that it’s not. Forced savings plan strategies, college education concepts, etc, all don’t hold up to scrutiny. My wife worked at an insurance company decades ago and recalls grandparents coming in to ‘cash in their policy’ they’d bought on little johnny when he was born – only to find out that $1000 in today’s dollars won’t put him through 4 years of university. Yes, that approach is incorrect.

    In short, do it or don’t, it’s not the end of the world either way. Particularly not with a Children’s Rider, not when the cost is lower than the Halo4 xbox game that they just bought.

  7. Assuming parents have good cash flow and have insured themselves to the max insuring the kids makes sense from a Tax point of view, a growth point of view and an ability to spend and enjoy money in retirement point of view.

  8. As an accountant I was anti child life insurance until I watched my best friend’s son die and I realized that the income the life insurance was covering, is mine. As a self-employed or small business employee, there are not many that have a benefit plan that would cover a long work absence due to emotional distress. I can’t imagine working right away after my child died, so I have coverage for at least one year of my equivalent salary so I can grieve my own way without worrying about the financial implications,

  9. Susan,

    If you like movies there is a great line in “ShawSkank Redemption”

    “Get busy living or get busy dying”

    “This movie is a wonderful lesson on reaching your full potential by casting your vision and overcoming life’s obstacles. Focus on your vision, don’t give up hope.

    I got life insurance on my twin boys with the idea of growth and the future.
    It grows every year in cash value and death benefit. Both policies start at $70,000 and by 85 grow to over $500,000 in cash value or $600,000 in a death benefit for a future generation. Cost is $100/month for 20 years paid up.

  10. 10. Andrew Spencer

    Promod…great article. There are way too many ambulance chasing insurance salesmen around. Its good to get a realistic contrarian view for a change.

    My take aways from reading it (and the relevant comments):

    1) Insurance should be used to protect oneself or family from unexpected and devastating events….therefore certain insurances make sense for different people based on their individual circumstances

    2) The value of the insurance is in how a person would use the $ payout (ie. the ability to take time off from work to grieve or take one`s child to the U.S. for treatment). The money is only a means to an end…not an end in and of itself.

    3) Ignore everything Glenn Cooke at LifeInsuranceCanada.com writes.

    -Andrew

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