For High-Net-Worth Investors: Life Insurance For Education Planning

For high-net-worth (HNW) investors, life insurance may provide benefits beyond protection, including helping to support the education costs of a child or grandchild. With the ever-growing cost of post-secondary education, many HNW investors are looking for different ways to help support the next generation. For those who have fully contributed to registered accounts (RESPs, TFSAs, RRSPs), the use of insurance may be a consideration. Permanent life insurance policies have certain attributes that can make them versatile financial tools. One feature is that these policies generally offer a cash value component that can grow over time on a tax-sheltered basis. The savings accumulated over the life of the policy could be accessed to help cover educational costs while the policy simultaneously secures insurance coverage. By insuring the life of a child, the cost of insurance is likely to be lower due to the lower risk of health issues and young age. Starting in the first year of the child’s life, the following example highlights the potential of a participating whole life insurance policy for a child with a monthly contribution of $250. The cash value component in this example accumulates to over $80,000 in 20 years, assuming a dividend interest rate of 6 percent annually (illustration, see chart). While the dividend paid by the insurance company is never guaranteed, many major insurance companies have continued to pay consistent dividends from year to year. These funds could be accessed (subject to tax consequences) to help cover educational expenses. Comparably, the same amount contributed to a Registered Education Savings Plan (RESP) over 20 years would grow to around $133,000 at an average annual rate of return of 6 percent, assuming the maximum lifetime benefit of $7,200 from the Canada Education Savings Grant (CESG).* This is why an insurance strategy is often recommended only after registered accounts have been exhausted. However, in addition to the potential for tax-deferred accumulation of wealth, the policy’s cash value can be used to cover any expenses if the child does not pursue a post-secondary education, unlike the RESP which can only be accessed for a qualifying education. As the example shows, if funds are left to grow in the policy, they could potentially form the basis for a substantial down payment on a home. Alternatively, once the child reaches the age of majority (or later, depending on the policy’s terms), the policy’s ownership could be transferred to them on a tax-free basis providing them with valuable life insurance coverage. A Cascading Life Insurance Strategy Some HNW grandparents are using insurance to pass along a legacy to grandkids while achieving estate planning benefits. With a cascading strategy, a grandparent would purchase a permanent life insurance policy on their adult child (as contingent owner) and name a grandchild as the beneficiary. The cash value could be accessed by the adult child to help pay for educational costs for the grandchild. Upon death, the policy’s ownership would be transferred to the adult child on a tax-free basis. When the adult child passes away, the grandchild would receive the death benefit on a tax-free basis. (It is important to note that the death benefit could be reduced by any withdrawals from the policy.) For estate planning, this would facilitate a generational transfer of wealth with no income tax consequences or probate fees (where applicable) and protect against potential claims of estate creditors. For HNW investors, life insurance may provide benefits beyond protection, including helping to support the growing education costs of a child or grandchild. To explore this or other ideas, please get in touch. *In this example, the $250 monthly contributions to the RESP would end in year 17 when the $50,000 RESP maximum contribution limit is reached, but contributions are assumed to continue until year 20 in a non-registered account. This is intended to provide a comparable example. The $133,000 outcome represents the growth of the RESP and non-registered account combined.

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