Life insurance for a child or grandchild

Start with the honest part

Life insurance replaces income or settles obligations when someone dies. A child has no income anyone depends on and no debts anyone would inherit. In the sense that the word usually means, a child does not need life insurance.

Sales material for these products tends to lead with the emotional case rather than the financial one, and it is worth naming that before looking at the arguments that do hold up.

The argument that does hold up

Guaranteed insurability.

A policy taken out on a healthy child locks in their ability to have life insurance for the rest of their life. If a serious condition develops at nineteen, they may find coverage difficult or expensive to buy as an adult. The policy bought at three is already there, and most include an option to increase the coverage at set ages or life events without any medical assessment.

That is a genuine feature. It is a bet on an uncommon outcome, and how you weigh it is a legitimate personal judgement. Some families with a known hereditary condition weigh it quite heavily and reasonably so.

Two things to check if this is the reason you are buying:

What the guaranteed insurability option actually allows. How much the coverage can increase to, at what ages or events, and until when. The value is entirely in this clause, so read it rather than taking a summary.

Whether it needs to be permanent. Much of the insurability benefit can be obtained through a convertible policy, and the conversion right is what carries the value. See converting term to permanent.

The other reason people give

Final expenses. If the worst happened, the family would face funeral costs and would likely want time away from work.

That is real, and the amounts are typically modest. A child rider on a parent’s existing policy usually covers this at a very low cost, which makes it the efficient way to address it. A standalone permanent policy is a much more expensive way to solve the same problem.

Where the sales case overreaches

“It is an investment for their future.” A small permanent policy on a child accumulates cash value slowly, because early premiums go to the cost of insurance and to setting the policy up. Compared with an RESP, which attracts federal grant money, or a TFSA once they are old enough, it is not competitive as a savings vehicle for most families. See is permanent life insurance a good investment.

“Rates will never be lower.” True, and the reason is that the risk of a child dying is very low. You are paying a small premium for a long time. The total paid over decades is not trivial.

“It teaches financial responsibility.” This is not an insurance argument.

The order that makes sense

Insure the adults properly first. This is the important one. A household where the earning parents are underinsured but the four-year-old has a policy has its priorities backwards, and it is a pattern that turns up regularly. See life insurance for new parents.

Use the registered accounts. RESP first, given the federal grant, then TFSA room as it becomes available.

Then, if you still want to, consider a child rider on an existing parent policy as the low-cost option, or a small standalone policy if guaranteed insurability specifically matters to you.

Grandparents

The same logic applies, with two additions.

Check with the parents first. Buying a policy on a grandchild without the parents’ knowledge causes awkwardness, and insurers will generally require a parent’s involvement in the application in any case.

Think about ownership. A policy owned by a grandparent on a grandchild forms part of the grandparent’s estate. Many people intend the policy to transfer to the child in adulthood, and how and when that happens should be decided deliberately rather than left to be worked out later. Transfers of policy ownership can have tax consequences, which is worth confirming with an accountant.

If you go ahead

Keep the amount modest, since the purpose is insurability rather than replacing anything.

Confirm what happens at adulthood: who owns it, who pays, and whether ownership transfers automatically.

And make sure the beneficiary arrangements across all your policies are sensible, which for households with young children is its own subject. See naming a child under 18.