In Canada, planning for the security of your child’s future generally starts with assuring that his post-secondary education will be provided for. It is not surprising that most parents find ways to finance this now very expensive post-secondary education with insurance policies and saving plans. So, which insurance policy would be more useful in planning how you would save for your child’s education? This blog gets to the crux of available options and dissects them in detail so that you make a very informed choice.
Understanding the Need for Education Savings
Post-secondary education in Canada comes with a price. Statistics Canada pegs the annual average cost at $6,000 to $20,000 for tuition, depending on the program and university, and when all the other additional costs like books and living costs are added into the mix, it is scary for many parents.
Education savings insurance policies, therefore, constitute a structured, disciplined approach to setting aside the savings needed. Yet, not all policies are the same. Among the two major types of policies one may consider are the Registered Education Savings Plan and the Education Savings Insurance Policy, the latter being more of a form of whole life or universal life insurance.
Registered Education Savings Plan (RESP)
The RESP is a government-registered savings account designed specifically for post-secondary education. Here are its standout features:
Government Contributions
One of the most appealing features of an RESP is CESG. Here, the government matches 20% of the annual RESP contribution to a maximum of $2,500 per year with a lifetime maximum per child of $7,200. In case families fall within the lower income bracket, supplementary grants are made by the government.
Tax Advantages
Contributions are made using after-tax dollars, while growth and grants are tax-deferred until withdrawal. Withholding taxes upon withdrawal from education means that, most likely, a student is going to have less income than his or her parent or other contributor, meaning little or no tax at all.
Flexibility in Investment
RESPs allow for various investment options, including mutual funds, ETFs, GICs, and stocks. You can tailor your investment strategy to match your risk tolerance and timeline.
Drawbacks of RESP
Although RESP accounts have numerous benefits, there are also some disadvantages:
- Contribution limits: Lifetime contribution limit per child is $50,000.
- Usage Restrictions: The funds set aside should be expended on allowable expenditures in education, but if the child does not attend the post-secondary institution, the unused grants should be returned to the government.
Whole Life Insurance for Education Savings
Whole life insurance is a type of permanent insurance policy that offers coverage along with cash value accumulation. Here is why it makes sense to save for education:
Guaranteed Cash Value Growth
Some of your higher-premium dollars go into an account called the cash value that grows at an assured rate over time and can help cover college and education expenses in a predictable and certain fashion.
Tax-Advantaged Growth
The cash value accrues on a tax-deferred basis. Certain withdrawals or loan proceeds from the policy can be tax-free, but they should not exceed the set limits.
No Usage Restrictions
Unlike RESPs, the funds from a whole life insurance policy can be used for any purpose, including education, starting a business, or other significant life expenses.
Built-In Insurance Coverage
Whole Life Policies offer the dual benefit of savings and life insurance. If the policyholder passes away, the death benefit ensures financial security for the child.
Drawbacks of Whole Life Insurance
- Higher Premiums: Life insurance Whole Term Policies are pretty pricey compared with other savings facilities.
- Limited investment flexibility- The guaranteed returns may be lower compared to RESP investments in the stock markets.
Universal Life Insurance for Education Savings
Universal life is another permanent product that offers both life coverage and investment. Investment in universal life is more flexible than whole life insurance.
Customizable Investment Options
Policyholders can opt for different types of investment accounts. These may range from low-risk to high-risk investments. It can be a higher return than that of whole life insurance.
Flexible Premiums
Universal life insurance also allows flexibility for premium payments that can be tailored according to how you want and can be paid in a particular year.
Tax Benefits
Like the whole life, the cash value grows tax-deferred and can be withdrawn tax-efficiently for education expenses.
Drawbacks of Universal Life Insurance
- Market Risk: Investing has some cash value that is subject to the ups and downs of market situations.
- Complexity: The structure of the policy can be complex and requires careful management to avoid lapses or unintended tax consequences.
Comparing RESP, Whole Life, and Universal Life Insurance
To determine which option is better for your child’s education, consider the following comparisons:
| Feature | RESP | Whole Life Insurance | Universal Life Insurance |
| Government Grants | Yes (CESG, CLB) | No | No |
| Tax-Advantaged Growth | Yes | Yes | Yes |
| Flexibility of Use | Limited to education | Unlimited | Unlimited |
| Investment Options | Wide range | Limited | Wide range |
| Insurance Coverage | No | Yes | Yes |
| Cost | Lower | Higher | Varies |
Factors to Consider When Choosing an Option
- Financial Goals: If your main objective is funding post-secondary education, an RESP is usually the most direct and cost-effective solution.
- Risk Tolerance: If you need guaranteed returns and life insurance coverage, your whole life may be more suitable. If you can tolerate the market risks, you have more investment options with universal life.
- Flexibility: If you prefer the flexibility of using funds for purposes other than education, then permanent insurance is the better alternative.
- Budget: RESP contributions could be adjusted in most budgets to accommodate, and permanent insurance policies require higher premiums.
- Budget: RESP contributions can be fit into most budgets, whereas permanent insurance policies cost more.
- Time Horizon: RESPs can be used when a shorter horizon is in effect, while permanent insurance policies become multi-generational wealth-builders.
Case Studies: RESP vs. Insurance Policies
Case 1: RESP for Post-Secondary Education
Lisa and Mark have a 5-year-old child for whom they contribute $2,500 annually to an RESP. They receive the maximum CESG per year of $500. When the child turns 18, the RESP has grown to $70,000 from contributions, grants, and investments. That will be sufficient to pay for tuition and other expenses. So, an RESP is simple and effective.
Case 2: Whole Life Insurance for Flexibility
Emma, a single mother, buys a whole life insurance policy with cash value. When her daughter reaches the age of university, the cash value in the policy is $50,000. She uses this money to pay for her daughter’s tuition. At the same time, the death benefit will secure her long-term financial future.
Case 3: Universal Life Insurance for Growth Potential
James and Sarah invest in universal life insurance that puts the cash value in the mix of the equity and bond funds. At the end of the 15th year, a cash value emerges that gives them $80,000 to bankroll their child’s education; they enjoy flexible investment opportunities, as well as tax-advantaged investments.
Balancing Multiple Strategies
In some instances, parents pool together strategies in order to make the most out of the respective benefits. An example would be to use an RESP to qualify for government grants while investing in a permanent insurance policy for additional flexibility and protection.
Conclusion
Select the right insurance or savings plan for your child’s education based on your financial goals, risk appetite, and budget. Although the RESP is more focused in that it provides government grants and tax benefits for saving, a permanent insurance policy offers flexibility in addition to guaranteed growth and life insurance coverage. Evaluate your family’s needs closely and consider hiring a financial advisor to develop a plan that can secure your child’s educational future while meeting your long-term financial objectives.
Learn More: How Much Money Benefits Could Add to the Registered Education Savings Plan (RESP)?