Tuesday, May 21, 2013

Life Insurance Is Purchased For A Child In Canada

We have explored the advantages and disadvantage in setting up life insurance for children.Today, let's examine a planning method with whole life par policy.

Beside universal life insurance in Canada, whole life policy is another kind of permanent life coverage. Simply speaking, the protection will last for the insured's lifetime. There are some whole life policies that pay out dividend, while others do not. For the policies that do pay out dividends, it is recognized as whole life ‘par' policy. Numerious important components for whole life par policy include the cash value, death benefits and dividend value. Each one of them has the opportunity to grow in the long run. Let's review them one by one:

Increasing Death Benefit:

When a life insurance is purchased for a child, many parents wonders whatever the face amount will be sufficient for the family of the child in the future. Inflation will absolutely reduce the purchasing power of the benefits. As a result, having an increasing death benefits is one of the major considerations. One unique structure of the whole life par policy is that the dividend can automatically be used to increase the death benefits. This method is called the Paid-Up addition. Given there is no stoppage to the Paid-Up Addition option, the child can benefit from having the increasing coverage, while no further medical underwriting will be required.

Increasing Dividend Value:

Dividend is where this strategy becomes more appealing. When an insures receives premiums for the whole life par policies, a part will go into paying for the claims, insurance's cost, and other expenses. The residuals will be allocated into investments include real estates, equities, bonds and others. Dividend will be distribute to the policies accordingly. As many portfolios are spread out into investments that pay out regular steady incomes, many Canadian insurers had been able to pay out a stable  dividends. Generally speaking, the larger the face amount of the policy, the more the dividends will be pay out. Dividend may be pay out in cash, or can be used to buy more life insurance coverage.

Increasing Cash Value:

A lot of permanent life insurance policies, particularly those that can be paid up, there are cash values within the policy. Cash value is the amount of funding one could receive when the policy is lapsed. Cash value is guaranteed in the contract, and will increase along with time. Another method one could access to this money without cancelling the policy is to borrow from it. However, the outstanding balance will reduce the death benefit and interest charges will be applied.

Other considerations:

Growth in the death benefits is not guaranteed, as dividend scale is variable, and both could be subjected to change. There could be taxation impact when a policy is cancelled. As one of the underwriting requirments, many insurers need the insured's parents to have life insurance coverage on themselves before purchasing for their child. The reason behind  this is parents are the one who currently look after the financial well-being of the child, therefore, the priority of coverage should be on the parents first. Of course, the suitability of using a whole life par insurance differs from families to families. For instance, some parents do not like the variable in the dividend scale of whole life policy, and prefer to use universal life insurance in Canada for their child. The above is only for information purpose, one should discuss with a financial consultant before making any decisions.


This article is for general information only and is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please consult an appropriate professional regarding your particular circumstances. This article does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such offer or solicitation. References in this article to third party goods or services should not be regarded as an endorsement of these goods or services.This article is intended for Ontario, Canadian residents only and the information contained herein is subject to change without notice.

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