Many older Canadians recognize their children are struggling when it comes to purchasing life insurance.sesame/iStockPhoto / Getty Images
Older Canadians have been stepping up to help adult children with home purchases and paying for their grandchildren’s education. Now, many are assisting with another cost: life insurance.
“There are a lot of [adult] kids that don’t have money for insurance right now, and so mom and dad are thinking about this a lot because they have the wealth to purchase coverage for them,” says Tracey Goldie, an estate planning specialist at RBC Wealth Management Financial Services Inc.
A recent survey by Canadian online insurance portal PolicyMe found 42 per cent of participants with children said buying life insurance is outside their budget – even though about one in four were unsure their family would be financially secure if an income earner passed away.
Many older Canadians recognize their children are struggling, and advisors can present them with two types of strategies, says Vikram Malik, vice-president of product solutions and innovation, insurance solutions at Canada Life.
In the past, the key strategy was paying the premiums for their adult children’s term coverage, which addresses the need to protect lost income. Now, he says, high-net-worth clients are starting to use permanent life insurance as a financial planning tool.
While term is less costly, permanent coverage not only provides lost income protection but also allows families to pass significant wealth to the next generation in a tax-efficient way.
Data on high-net-worth households point to a potentially sizable need.
A September report from the Parliamentary Budget Officer notes that Canada had 4.4 million families in 2023 with a net worth of $1-million or more, and 108,000 families with net worth exceeding $10-million.
The latest household balance sheet report from Toronto-based Investor Economics, an ISS Market Intelligence business, forecasts total household wealth in Canada will grow to more than $33-trillion by 2034 from $21.5-trillion today. It further estimates that about $800-billion of that wealth will be passed to the next generation.
Permanent insurance products are among the few tax-sheltered vehicles Canadians have at their disposal, Ms. Goldie says.
“People are familiar with the tax-free savings account and the principal residence exemption, but less so with the third option: life insurance, which offers potentially larger tax savings,” she says.
“With this solution, parents are moving wealth that’s growing tax-exposed in an investment portfolio to a permanent policy where it grows tax-sheltered.”
Unlike aging parents purchasing permanent coverage for themselves, which provides a tax-free death benefit to their estate, purchasing this insurance for their children protects growing families against income loss and, over time, acts as a pool of capital for children to draw upon.
As Mr. Malik explains, most participating whole life policies pay dividends back to the policy, which can be withdrawn by the insured. However, this “should be a last resort, as it has potential tax implications,” he says, and the death benefit, which is worth substantially more, would no longer be in place.
Often, a better strategy is a policy loan with the insurer, or a loan from another financial institution using the policy as collateral, Mr. Malik adds. The money is tax-free, and the loan is repaid upon death.
Another advantage of buying a permanent life policy for adult children is that the premium costs are lower than for permanent life policies covering aging clients because the insured is younger and healthier, he notes.
Still, premiums are more costly than term coverage, and not all parents have the financial capacity to purchase permanent plans.
For them, term coverage may be a better fit, says Tim Mawhinney, president and chief executive officer of Blue Cross Life Insurance Co.
“It’s not dissimilar to grandparents funding RESP contributions,” he says about the potential monthly cost.
Term products also typically have the option to convert to permanent with the benefit of the insured already underwritten, he adds.
Adopting a niche strategy
Often, the biggest barrier to implementing these strategies is awareness.
Many advisors are unfamiliar with this fairly niche strategy, Ms. Goldie says. Others may be reluctant to suggest a strategy involving moving considerable investable assets under their management to a permanent policy.
“Many can be worried about assets coming off their books,” she says.
Yet, not discussing these strategies entails risk, too.
“If you’re not doing this type of wealth planning for your clients, you leave yourself open to another firm offering that value proposition and losing your clients,” Ms. Goldie says.
Rod Tyler, certified financial planner with The Tyler Group Financial Services at Peak Investment Services Inc. in Regina, says insurers are now raising awareness among advisors, citing a seminar at a conference he attended recently.
He has assisted aging clients in purchasing permanent coverage for grandchildren.
The overarching strategy is having the cash value in a permanent plan “accumulate in the earlier years and subsequently be withdrawn by the grandchild” for needs such as a down payment on a first home.
The amount of coverage doesn’t need to be significant, he says. Advisors can work with clients to tailor an affordable premium with enough death benefit and asset growth to fund, for example, eventual contributions to a First Home Savings Account.
While the strategy can be complex, including how to continue paying premiums should the grandparents pass away, it’s generally a win-win for advisors and clients, Mr. Tyler says.
The family receives income protection and a tax-efficient strategy to transfer wealth over time, and the advisor can forge relationships with the next generation of the family.
“If you do this well … your business will last because not only do the parents consider you a trustworthy advisor, their children will too,” he says.