Ironically as apple season is here, I was reminded of the old adage “The best time to plant an apple tree was 20 years ago – the second-best time is now.”

This month I am investing in Whole Life Insurance policies for my children. I am kicking myself for not doing it earlier (literally 20 years ago) – but as the adage goes, now is the second-best time.

Why am I doing this for them?

  • Canadian life insurance policies are high quality financial assets – whole life policies accumulate cash within the policy (cash surrender value) that grows on a tax deferred basis. The younger the person, the more runway for growth.
  • Risk adjusted returns in Canadian participating policies exceed many asset classes over time. See our article on this subject. An insurance policy provides stability and diversification to an overall investment portfolio/strategy.
  • The cash surrender value is an asset that can be leveraged at competitive borrowing rates or drawn down under certain circumstances to help with life’s events such as school, starting a business, buying a house. In many instances, banks only want to lend when you least need the money, it is always good to have a source of capital you can depend on when you need it most.
  • Transfer of wealth – The asset may be transferred to the child or their parents without tax implications.
  • Buying a whole life insurance policy at a younger age locks in a lower premium that stays constant for life – younger people also tend to he healthier, so not only is their younger age contributing to a lower cost of insurance, so is their health status.
  • When they are younger, a higher percentage of the premium goes towards the growth part of the policy which compounds over the life of the policy.
  • As their family grows and they have dependents, they have permanent life insurance in place – you can’t always get life insurance when you need it.
  • Later in life, adjustments may be possible to your policy so that you stop paying premiums and instead draw down on the accumulated value as a supplement to retirement income.

Why should I have done this for them 20 years ago? And why will I buy a policy for my grandchildren when they are born?

  • Lower premiums
  • Longer time horizon for growth of the investment component
  • Early financial literacy – An asset that can be used to teach children about money – they can watch the cash value grow – if you choose a Universal Life policy, they can have input into what investments are in the policy (although you lose the guaranteed stability of the PAR investment fund).
  • It is a good supplement to the RESP – and has more flexibility – if it is purchased early enough, there is substantial cash (see graph below) in the policy by the time your child goes to school – and, unlike an RESP, if your child does not go to school, this money can be used for other things like starting a business.

Here’s an example showing an investment of $5,000/year into a whole life insurance plan:

So – as the children you care about in your life return to school, don’t make the same mistake I did – think about providing them with a valuable and flexible asset that will set them up for success in the future.

If you’re interested in seeing how this could work for you, click here to book a time.