Kids don't come with instruction manuals, and neither do their financial futures. New parents are faced with a host of monetary issues, and among them is whether to invest in life insurance or other financial instruments.
Melanie Kirkey knows firsthand. The 34-year-old and her husband decided to look into life insurance following the birth of their first child three years ago.
“It was daunting and pretty complex. It was a lot of information that's written in this specific language that's not layman's terms,” says the mother of two. “And there are so many choices.”
Life insurance is generally thought of as income protection in the event of a person's death. But, like other financial investments, buying the proper insurance can be about finding the balance between a family's immediate financial needs and their long-term requirements.
You have to prepare for future expenses, but this includes ensuring that future can be maintained in case of death, says Saundra Edwards, assistant vice-president for product marketing for Great West Life, Canada Life and London Life.
“If you’re hit by a bus tomorrow, what expenses would you need to cover?” asks Ms. Edwards. These are the harsh, realistic questions young parents need to ask themselves, she says.
Ms. Kirkey and her husband hired an investment broker to help them navigate the confusing world of financial planning, including the types of insurance.
Life insurance can be split into two main types: term and permanent.
“Term is like renting an apartment,” says Mitch Reynolds, president of Life Guard Insurance in Calgary. “It provides you all the functionality you need. If you rent an apartment you've got a roof over your head, a bedroom, a bathroom, a kitchen, and everything works. Same with term life insurance, it gives you the risk protection.
“If a person was to pass away while they're ‘renting,’ the company will pay 'x' amount of money out.” Term policies have an expiration date, and people have the chance to renew the policy, but the price usually goes up after the term is complete.
“Permanent life insurance is like buying the house,” says Mr. Reynolds, adding that this type offers coverage throughout your life. “You don't own it fully in the beginning, but you build equity in it.”
Permanent insurance premiums pay for the death benefit and add to the policy’s cash value, which you can usually withdraw from or borrow against. Permanent life insurance can be very complex, Mr. Reynolds warns.
There are no hard and fast rules recommending how much insurance to buy. In some cases, a combination of life insurance alongside other investment vehicles may be a better approach. Best to consult a specialist, experts say.
But understanding the objective – whether it’s retirement, education or mortgage payments in case of income loss – will help narrow down the options.
“They need to assess what their needs are,” says Royal Bank of Canada financial planner Narinder Gaday. “You say, ‘I want financial success,’ or ‘I want financial freedom.’ Well, what does that mean to you? Is it an education fund for your children, or is it just a case of if the spouse passes away they need to be taken care of financially? Or is it successful retirement?”
Parents need to know what they can realistically afford and maintain for an extended period of time. “A lot of people do not have a grasp of what their cash flow is,” Mr. Gaday adds.
So when should parents start investing in life insurance or other investment options for their children?
Mr. Gaday’s advice: “The earlier the better, no doubt about that.”