The Pros and Cons of Insuring your Children

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?

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