Insuring the life of a child is a debatable issue that is difficult to bring up with your clients. Still, there are many sound reasons for your clients to consider buying life insurance for their children.

Typically, life insurance provides the dependants of a policyholder with financial protection in the event of untimely death. According to Raymond Yates, senior partner with Save Right Financial Inc. in Mississauga, Ont., a needs analysis is conducted to evaluate the client’s current assets and future liabilities to arrive at his or her financial risk. This will determine the amount of life insurance that is required,

But a child, who does not yet earn a paycheque and has no dependants, doesn’t need to insure financial risk. Thus, while a child’s death would have dramatic emotional impact on his or her parents, it would not have significant financial impact. So, life insurance is not really required for the traditional reasons. And who wants to benefit from the death of their child?

Of course, there are expenses such as the cost of a funeral and potential lost wages to consider in the event of the death of a child, Yates says, but these are not among the critical considerations.

Life insurance for a child “cannot be viewed from a risk-management perspective,” says Asher Tward, vice president, estate planning, with TriDelta Financial Partners Inc. in Toronto. “The needs analysis doesn’t have to be the impetus for buying insurance.”

Rather, he adds, it is about future benefits that can be derived. Tward says there are several reasons why it makes sense to insure the life of a child. These include:

1. Premiums are much lower and can be locked-in for life when insurance is established at an early age.

2. If a policy with a limited pay option is acquired, it can be paid up within, say, 10 or 15 years but provide coverage for life.

3. The cash value in the policy will grow tax-free for life over an extended period.

4. The child is protected against becoming uninsurable should he or she develop some health condition in the future or takes on a high-risk occupation as an adult.

5. If parents have hereditary health issues, insurance at an early age can provide a future safety net. However, the parents will have to disclose these issues to the insurer.

6. The parent policyholder can transfer ownership of the policy to the child when the child becomes an adult without any tax consequences.

Tward does not recommend buying term insurance, which, he says, covers only short-term risks. He believes a permanent policy such as universal life (UL) can allow your clients to save for a child’s future. “It can give them a head start,” he says.

The savings component of a UL policy grows tax-free until withdrawn, for instance. Some of these policies also allow additional premiums, which accumulate in a fund over time to the benefit of the child.

“[This] is a powerful strategy to transfer wealth,” Tward says. “There is no deemed disposition or attribution rules” when a policy is transferred to an adult child. As well, the adult child can take money out of the policy, for example, to pay for tuition costs or for other major expenses. Plus, he says, “They [will] have insurance coverage before they have their own kids.”

Lise Andreana, a wealth and estate planner with Continuum II Inc. in Burlington, Ont. and author of No More Mac ‘n’ Cheese! The real-world guide to managing your money for 20-somethings, says suggesting that “parents buy insurance for their kids is way down my priority list.” She does not recommend such insurance but is not against it, but adds: “Parents must be insured against all risks first.”

Yet, Andreana thinks life insurance for children is “a wonderful idea,” especially for grandparents who want to “provide for their grandchildren’s future.” Insurance coverage is an alternative to “loading the basement with more toys” and can be used as a savings vehicle for education and events such as a weddings when the child grows up. Andreana advises that when a grandparent takes out insurance on a child that a parent be named the “contingent owner.”

And although insuring the lives of children may not be expensive, she adds, it comes down to having “excess cash flow” after meeting all other obligations.

Tward agrees it’s a matter of cost but adds that buying such a policy shows you are taking responsibility for your children’s future.

Yates “positions life insurance for children as gifts” from their parents, stressing the “tax-free growth” within the policy.

John McVittie, president of APK Wealth Retention Inc. in Toronto, does not recommend insuring the life of a child despite the perceived benefits. He believes there are other ways to achieve the same results.

© 2012 Investment Executive. All rights reserved.