September 20, 2016
With a new school year starting up, September marks an important turning point in the year for many Canadians – especially us parents. If you are a parent of a school-age child, something that may be on your mind these days is the cost of post-secondary education. Even if your child has only just had their first day of kindergarten, this is one of those topics where the sooner you address it, the better.
Why your RESP may not cut it
For most of us in Canada, a registered education savings plan (RESP) is the first tool that comes to mind when we talk about tax-sheltered saving for our children’s education. While RESPs are certainly useful and a good place to start, they have their limitations, including a $50,000 contribution limit per beneficiary and maximum 35 years to use the funds. The reality is that the total cost for your child to obtain just a typical four-year undergraduate degree is likely to exceed $50,000. Furthermore, your child may well be global-minded and could choose a post-secondary institution that is not considered eligible under the RESP program.
These limitations mean that RESPs will likely fall well short of your objectives if your child chooses to pursue a costly education at an overseas institution – for example, an Ivy League university – or plans to pursue studies beyond the undergraduate level.
Fortunately, there is another option for flexible, tax-deferred saving for your child’s education that can be used in tandem with an RESP: life insurance.Click to tweet
Fund my child’s education with … life insurance?
Is using life insurance a conventional approach to saving for post-secondary education? No.
Is it a smart, tax-efficient approach favoured by wealthy families? Yes, and for good reason!
Using a permanent life insurance policy as a savings tool for post-secondary education is actually fairly simple and can potentially result in considerable tax savings. As the parent, you take out a policy on your child’s behalf with you as the policy owner and your child as the insured. This type of policy has both an insurance component and an investment component, with the latter accumulating dividends. Because you are starting when your child is young, these dividends have a long time to compound and grow the value of the policy. And depending on the amount you apply for, medical underwriting might not even be required!
When it’s time to start paying for your child’s post-secondary education, you have two main options:
- The first is to surrender the life insurance policy to access its cash value. This withdrawal may be taxable to the owner of the policy. If so, it will be taxed either at your marginal tax rate or at your child’s marginal tax rate if you have transferred ownership to them (you have the option to transfer ownership of the policy to your child on a tax-free basis anytime after they turn 18). Since your child’s marginal tax rate will typically be quite low, there is potential for significant savings.
- The second and preferable option is to take out a loan against the value of the insurance policy and use these funds for your child’s studies. The bank issuing the loan becomes a beneficiary of the insurance policy via a collateral assignment for the amount of the loan, while you or your child (depending on your preference) simply needs to pay the interest on the loan. This approach is advantageous because the growth of the insurance policy’s value will exceed the interest on the loan.
Huge benefits beyond education
Even if your child doesn’t end up using their life insurance policy to fund their education – for example, because they are awarded a full scholarship – there are still major benefits to having it. Life insurance premiums are based on factors such as the age, health and lifestyle of the insured at the time when the policy is created; the younger and healthier the insured, the lower the premiums. As long as the premiums continue to be paid when due, the value of the policy will continue to grow and the premiums will be locked in, regardless of changes in the health of the insured.
Since most young children are healthy, you can lock in lifelong insurability for your child at a very low cost, giving them coverage throughout their lifetime regardless of any future health issues.Click to tweet
If the parents of a healthy two-year-old girl wanted to purchase a $3 million whole life insurance policy on her behalf, the premiums on this policy would be much, much lower than what the same girl would have to pay if she decided to purchase a similar policy at age 30 or 40.
While they are unlikely to appreciate it when they’re younger, this is a significant gift to your child – and future generations – that they will be increasingly grateful for as they grow older and wiser. Wouldn’t you have liked it if your parents had proactively sorted out your insurance needs when you were little?
Ensuring a brighter future
There’s no way around it: your child’s post-secondary education is going to be expensive. The good news is that with advance planning and some outside-the-box thinking, you can invest in your child’s education on a tax-effective basis while at the same time giving them a valuable head-start toward a well-insured, financially secure future.
Whether your child is just learning to walk or currently learning to drive, it’s never too early or late to take advantage of this opportunity. We’d enjoy the opportunity (and have the expertise) to assist you with making smart use of insurance to fund your child’s education, freeing up your time to focus on supporting and enjoying your child’s journey through life.
Since there are too many variables and options to cover in this article – including the amount you want to save per year and your specific objectives – this is something best discussed in person. So we invite you to give us a call (+1-647-808-7700), or send us an email to discuss how we can build a brighter future for your child.