Whether we are parents, grandparents, aunts, uncles, or siblings, most of us have children in our lives who we care about deeply. We want them to have a full life now, and we also want to set them up for success and happiness in the future.
And even though most of us are familiar with RESPs, not everyone is aware that there are other ways to save for and help protect a child’s financial future. These four solutions can help ensure a well-rounded financial security plan:
- Registered education savings plans (RESP)
- Tax-free savings account (TFSA)
- Child critical illness insurance
- Insured deposit funds
I will give you a brief summary of each one, and then in future posts will delve into each one more deeply.
Most families are familiar with these plans, and many begin saving through an RESP when the child is very young. The biggest advantages here are tax-deferred growth of your investments and the Canada Education Savings Grants, which match 20 per cent of your contributions up to $500 per year (and a lifetime maximum of $7,200 per child). With a self-directed RESP you can choose how your money is invested, and we can work with you on choosing a suitable investment. The biggest disadvantage is the lack of flexibility if your child does not attend a post-secondary program (there are options if this happens, but you may still end up with a tax liability).
While a TFSA can only be held by someone over age 18, if you have spare contribution space in your own TFSA you can earmark some of it for saving for the children in your life. The big advantage to this is of course that the growth is completely tax free. As with RESPs, we can help you select appropriate funds that will allow for growth over time; but unlike RESPs you can use the money however you like. If the child does not attend a post-secondary program, or if major events occur along the way, you can re-allocate the savings toward something else. The disadvantage of this method is that there are contribution limits. Currently a new TFSA has a starting contribution limit of $31,000 and growing by $5,500 per year. Thus if you have already used up some or all of your contribution space this may not be an option for child savings.
Child critical illness insurance
Most parents agree that if their child suffers a critical illness, their first priority would be to take time off of work and care for the child; financial worries only add stress to the situation. As a result, we want to ensure that you have a plan in place to protect your finances should the unthinkable occur. Critical Illness insurance is a cost-effective way to do this. It would provide a lump sum benefit that can be used any way you like, and would allow you not just some time off of work but also the option of additional treatments or medications that may be costly. This allows you to focus on your child’s recovery instead of how you will pay for it. You may even wish to look for a policy that offers a Return of Premium Rider if you are interested in recouping 100 per cent of the eligible premium paid if a claim has not been made.
Insured deposit fund
This is the gift that keeps on giving! This method takes advantage of the tax-deferred, safe and flexible nature of permanent cash value life insurance. You would contribute to the plan for 20 years, while both the death benefit and cash value grow over time, and continue to grow long after you have stopped paying premiums. There are no contribution limits, and you choose how the money is used. Cash value can be accessed along the way without collapse. When your children reach adulthood, you can sign their policies over to them and they can use it as they see fit. Also, starting their life insurance programs while they are young and healthy can lock in their insurability and low rates. The cash value can be used to fund education, pay for a wedding, put a down payment on a home, or start a business. In addition, the policy may be used as collateral for a bank loan. This is something that your child will be able to use for the rest of his or her life—not just in the university years. And unlike many investments, the value of the policy is guaranteed to only increase, never decrease, as long as the scheduled premiums are paid.
Hopefully this has given you some food for thought on the various ways you can enhance and protect your children’s financial well-being. As I stated above, I will go into more detail on each of these pieces in future posts; in the meantime if you would like more information please contact me.