A child becoming critically ill or dying is an event no parent wants to think about, even when considering insurance needs. Yet, insurance companies offer policies that can help clients cope with the financial consequences of those rare and heart-wrenching events.

For example, Sun Life Financial Inc. and Manulife Financial Corp. , both of Toronto, as well as Montreal-based Standard Life Assurance Co. of Canada and Desjardins Financial Security of Lévis, Que., are among the Canadian insurers that offer life and health insurance products for children under the age of 18.

Although a financial advisor’s position regarding any insurance policy should be straightforward — buy a policy to indemnify losses resulting from a particular event — there is growing debate surrounding the inclusion of life and critical illness insurance products for children in clients’ portfolios.

Some insurance experts, such as Jim Ruta, president of Burlington, Ont.-based Expertinstitute.com, say such products can be a godsend in defraying the costs incurred when a child becomes critically ill or dies. Others, such as Jim Rogers, founder and director of Rogers Group Financial Ltd. in Vancouver, argue that it is inappropriate to insure children, who are not contributors to a household’s finances.

Are these products necessary components of a portfolio, or do they capitalize on the fears of clients and exploit children’s misfortune for the financial gain of parents and advisors? Both sides of the debate offer compelling arguments that you should consider before offering these products to your clients.

The death or critical illness of a client’s child poses a significant risk to that client’s financial wellbeing, Ruta says. For example, the death of a child could result in significant funeral costs, which could drain the cash reserves of a middle-class family. In addition, parents may need to take time off from work to grieve. Children’s insurance protects families in these circumstances from having to deplete RRSPs or other savings, or go into debt to cover such costs.

When a child becomes critically ill, parents may need to take time off work to take that child to appointments to receive medical treatment. Parents’ short-term disability insurance does not pay out in these cases, whereas a CI policy for children does. CI policies for children give parents options for protection they wouldn’t have through their own policies.

Proponents of insurance for children also argue that this coverage provides future insurability to the child — especially important in circumstances in which a parent is “rated,” or uninsurable. Relatively cheap and affordable compared with adult products, insurance for children, whether for life or health coverage, guarantees the child will be insurable for his or her lifetime, regardless of health status.

For high net-worth clients, insurance for children can become a means of building a child’s financial future. A child’s policy bought today is an asset the child can carry for the rest of his or her life.

On the other side of the debate are those who say insurance for children does not make financial sense. While it may seem insensitive to say so, when a child dies, parents no longer incur the expenses of raising that child; the parents are, in effect, better off financially.

As for building a child’s financial future, those opposed to insurance for children argue that parents can use other financial vehicles, such as trusts and tax-free savings accounts.

The point on which both sides agree is that insurance for children should be sold to a client only after that client’s primary insurance and investment needs have been addressed. Those six basic financial needs, according to Rogers, are: emergency savings; retirement savings; life insurance for the main income provider; CI and disability insurance to replace employment income; long-term care insurance; and saving for the children’s education.

“How can insuring a child come before one of those six needs?” Rogers says. “I don’t think that’s being asked in enough cases where child insurance is being sold.”

Even some of the most vocal advocates of insurance for children, such as Ruta, agree that the parents’ needs should come first.

Although insurance for children is not an essential part of a portfolio, it may represent an opportunity to better serve your clients whose other needs are being served. Here are some of the issues to consider when deciding whether insurance for children is right for your clients:



> Income Replacement

Ruta emphasizes the importance of income replacement for parents who may need time off work to grieve the death of an immediate family member. “From my personal experience,” he says, “it was years before I returned to work at my normal level after I lost my wife.”

But in cases in which your clients are severely traumatized by the loss of their child, Rogers says, the employer of at least one of the parents may provide some form of bereavement leave. “If the employer isn’t covering the loss of income,” he says, “you could also argue that the parents will be compensated by the future savings they could realize from not having to feed, clothe or educate that child.”

A common notion is that a parent’s short-term disability coverage would kick in if the parent needed time off work to cope with the loss. However, says Nathalie Tremblay, health products manager, individual insurance, with Desjardins, DI coverage does not apply in this case.@page_break@> Funeral Costs

“[Clients in] the middle market,” adds Tremblay, “may not have money to pay for the type of funeral they want; an insurance policy gives them choices.”

The average cost in 2010 for a funeral service and a container or casket was $6,500, according to the Board of Funeral Services of Ontario. That is a substantial expense for many families, Tremblay says: “Without a policy, they may need to dip into their RRSP or savings.”

One popular option to cover funeral expenses of children in the middle market is the use of a family rider, in which all the children in a family are covered under a single policy and a single premium.

Rogers agrees with the use of family riders for families with multiple children. But, he says, an emergency reserve of funds for the purpose of funeral costs would also suffice.

If a family does not have an emergency fund, you should make it your priority as an advisor to help your client build one before recommending insurance for children. “Over the course of six months,” says Rogers, “[clients] can build [their] own cushion for this type of loss within a TFSA.”

That might be good idea in theory, says Ruta; but, in reality, building a savings account within a short time can be difficult. “Life has gotten more expensive,” he says, “it’s becoming harder and harder for clients to save for emergencies.”

If a family does begin putting money into a reserve fund, Ruta adds, it has only limited protection in the early going: “Paying into a child insurance policy guarantees the risks will be protected today.”



> Insurance vs Investing

If your client buys a $100,000 life insurance policy for a child, with a premium of $46 a month for coverage that is paid up after 10 years, that same policy will still be worth $100,000 when that child is 62. Meanwhile, when that child reaches age 18, he or she can borrow against the guaranteed cash surrender value of that insurance policy.

Some would argue that you could do just as well by having your client put that $46 a month into an investment account. But, Tremblay says, after three months, the investment account is worth just the $138 it has accumulated. If the child dies at that time — as unlikely as that may be — the account pays out $138. But if your client had bought a $100,000 life insurance policy with that $46 a month, it would pay the full $100,000. “With an insurance policy,” Tremblay says, “if the worst happens, the child is fully covered.”



> Bearing The Costs

When a child becomes ill, Tremblay points out, the costs of taking care of that child can be higher than the costs incurred by the death of a child. These costs are particularly tough on middle-market clients. “In families in which both parents contribute equally to household income,” she says, “one person taking time off work to care for that child can cause a great financial strain on the household.”

For a family with a sole breadwinner, the effect on income is not as great. “In this case,” Tremblay says, “the non-income-earning spouse would take care of the child’s appointments and treatments, and not as much income would be lost.”

In the higher end of the middle market, in which family income is $150,000 or more, insurance products for children become more of an emotional or “gift” purchase, Tremblay says: “People want to give a gift that a child will have for the rest of their life.”

Perhaps the most important benefit of insurance for children is the child’s future insurability, says Laurel Pedersen, assistant vice president, individual health insurance product development, with Sun Life: “By putting policies in place today, despite their health in the future, the child will still be insurable and have options.”

But there are other gifts that are far more valuable to a child’s financial future, says Moshe Milevsky, author of Insurance Logic and associate professor of finance at York University’s Schulich School of Business in Toronto: “You can donate a trust or start a registered education savings plan.”

Rogers agrees, pointing out that the chances of a child realizing the full value of a life insurance policy are slim: “The likelihood of a child needing that money for post-secondary school is far greater than the likelihood of them dying before that age or getting [critically ill].”

Unless there is a compelling medical reason for getting children insured early on, Milevsky adds, “It’s hard to make a case for child insurance.”



> Exceptional Cases

As for medical circumstances, both proponents and critics of insurance for children agree there are exceptional cases in which a life or CI policy is necessary. These include cases in which a parent has a condition that causes him or her to be uninsurable, and cases in which children have genetic predispositions to cancer, obesity or diabetes.

Insuring children at an early age can protect them from becoming rated or having to pay higher amounts for life and CI later on, Milevsky admits: “If there is a deep, dark secret within the family history that might prevent a child from getting insured later in life, then child products may make sense.”

Regardless of how much financial sense a child’s policy makes in a particular case, if your client wants a specific insurance product, it’s up to the industry to provide it, according to Ruta: “As long as clients want to buy child insurance, we shouldn’t be stopping them.” IE