Having a baby is quite possibly the biggest life event you’ll ever experience. When you welcome a new person into the world, your plate is going to be full. Diapers, bottles, sleep … things will never be the same.
You may feel overwhelmed at first, but things do settle down. One of the things that you may overlook in all the chaos, though, is whether your baby needs life insurance. Luckily, we’re here to help.
Do babies need life insurance?
Thinking about life insurance for your newborn baby may feel a little dark, but it’s never too early to purchase a policy for them.
Purchasing an insurance policy for your baby is a way to help should the unimaginable occur. Life insurance helps you not worry about things like funeral expenses, giving you and your family the time you need to grieve.
Life insurance for your baby doesn’t need to be a major investment. Term life policies can often be purchased as add-ons to your own policy, or you can acquire a standalone one. Term insurance is also affordable and can be as cheap as $3 a month.
A permanent insurance policy is more expensive, but it also has the benefit of a cash value option. This will be examined in further detail later, but the cash value allows you to accrue interest on your investment. Keep in mind, though, that the gains might not be as great as other forms of investment, so it’s best to keep your expectations within reason.
When should you consider life insurance for a newborn baby?
Life insurance for your baby is not a necessity, but it can provide peace of mind. That being said, if you are considering purchasing it, the earlier the better.
Buying life insurance early allows you to lock your child into a policy that they can transfer to their own name as an adult – often without a medical exam. This is a huge advantage should your child develop colitis, diabetes or another medical condition. Any one of these conditions can make it more difficult to get life insurance, so buying a plan when your child is a baby ensures that they’re protected for life.
If you purchase a permanent life insurance policy when your child is young, you also gain the benefit of investing more money over time. The more money invested means the more interest accrued, which is always a good thing.
Types of life insurance for babies in Canada
As explored above, you generally have two main options when buying life insurance for your baby: term life insurance or permanent life insurance.
- Term life insurance is generally an affordable way to get your child insured, though it does offer a lower benefit payout. If you already have a life insurance policy yourself, be sure to speak to your provider as it is sometimes possible to have a child term rider (CTR) added to your policy. It’s also recommended to see if the policy is convertible when the child becomes an adult, as this can save them money in the future – as well as possibly having to undergo a medical exam.
- Permanent life insurance is more expensive than term life, but it additionally offers a cash value benefit. Permanent life policies usually grant you the option of purchasing a participating or non-participating policy. Participating policies are those that collect dividends – that is, profits from the investment element of the insurance policy – while non-participating do not.
There are, of course, options within both policies, so it’s a good idea to speak with your life insurance company to discuss the options available to you.
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Cash value insurance for investing in your baby’s future
A permanent life insurance policy offers the ability to borrow against the policy as well as a cash value benefit.
In effect, when you contribute to a permanent life policy, you’re also contributing to a “cash value” account. This is one of the reasons why a permanent insurance policy costs more, as it’s combining the cost of a term life policy with this feature.
The amount that is contributed to the cash value portion accrues interest, and you can select whether you want a more aggressive or more conservative investment option.
When the ownership of the policy is transferred to the child when they reach adulthood, they can choose to withdraw funds from the cash value account or to borrow against the policy. This flexibility allows them to use the money to pay for post-secondary education, help with a down payment on a home, or supplement their RRSP account – however they see fit.
The flexibility afforded by a permanent life insurance’s cash value element is a major asset. Not only are you getting the benefit of a life insurance policy, but you’re also receiving a nice return on your investment.
The benefits of buying life insurance for your baby
If you’re considering purchasing life insurance for your baby, there are some key things to keep in mind. Some questions you might want to ask yourself are:
- What financial goals do I have for my child?
- Can purchasing life insurance help achieve these goals?
- How much in life insurance coverage do I need?
- Is a term life or a permanent policy my best option?
- Are there alternative investment options that are better suited to my family?
While purchasing life insurance for your baby is an extra expense, the comfort of knowing that in a worst-case scenario certain needs will be covered can be worth the investment. Additionally, a permanent life insurance policy that provides cash value can also assist your child in the long term.
The bottom line
Buying life insurance for your baby may be something you would rather not consider, but if you have the time, it’s worth speaking to your insurance provider to find out more. And don't forget to compare life insurance quotes with us – so you can secure your child's financial protection for the best rate possible.