With summer winding down and 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.
Why your RESP may not cut it
In Canada, a registered education savings plan (RESP) is the traditional solution for 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. That may seem like more than enough, but the cost of education is constantly rising. The average undergraduate tuition cost for a 4-year university program in Canada is $27,352*, and the average jumps to $46,950(USD)** for studying in the US. Don’t forget these figures exclude the cost of housing, textbooks and meal plans.
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.
Fund my child’s education with … life insurance?
Using life insurance to save for post-secondary education is actually quite simple and can result in considerable tax savings. As a 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. By 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 pay 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 can do so on a tax-free basis anytime after your child turns 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 simply needs to pay the interest on the loan. This approach is advantageous because the growth of the insurance policy’s value will typically 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 are 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.
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. 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.
At Rubach Wealth, we 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. We invite you to give us a call today to discuss how we can build a brighter future for your child.
*Source: Topuniversities.com How Much Does It Cost to Study In Canada, Dec/2018
** Source: Valuepenguine.com Average Cost of College in America: 2019 Report