Life Insurance vs RESP: Why a Child's Life Insurance Policy Trumps RESP for College Funding

Purchasing a life insurance policy for your child as a means to fund their college education in the future is a strategic financial move that offers unique benefits compared to saving through a Registered Education Savings Plan (RESP). Here's an explanation of how this can work and its advantages:

1. Funding College Education with a Child's Life Insurance Policy:

Purchasing a life insurance policy for your child involves acquiring a policy in their name, with you as the policy owner and the child as the insured. In the future, the policy can serve as a financial resource for funding their college education. Here's how this strategy can be implemented:

a. Selecting a Child Life Insurance Policy: Start by choosing a suitable child life insurance policy. These policies are typically whole life insurance or universal life insurance policies designed for children. They accumulate cash value over time, making them ideal for long-term financial planning.

b. Paying Premiums: As the policy owner, you will be responsible for paying the premiums on the child's policy. Premiums can be set at a level amount or can be paid up front, depending on the policy type and your preferences.

c. Cash Value Growth: Over the years, the child's life insurance policy will accumulate cash value. This cash value grows tax-deferred, and you can customize the policy to invest in various asset classes, potentially increasing its value over time.

d. Accessing Cash Value: When it's time for your child to attend college, you can access the cash value in the policy to cover their education expenses, including tuition, books, accommodation, and other related costs.

e. Tax Advantages: In Canada, the cash value growth in life insurance policies is tax-deferred, and withdrawals or policy loans are generally tax-free or tax-advantaged. This provides a tax-efficient way to fund your child's education.

2. Benefits of Using a Child's Life Insurance Policy for College Funding Over an RESP:

Now, let's explore the advantages of using a child's life insurance policy for college funding compared to saving through an RESP:

a. Flexible Use of Funds: With a child's life insurance policy, the cash value can be used for various financial needs, not just education. If your child decides not to pursue higher education or has other financial goals, the policy's cash value remains accessible for those purposes.

b. No Contribution Limits: RESPs have annual and lifetime contribution limits, potentially limiting the amount you can save for education. In contrast, a child's life insurance policy allows you to contribute without such restrictions.

c. No Grant Dependence: RESPs may offer government grants, but these grants come with specific eligibility conditions. A child's life insurance policy is not dependent on grant availability, making it more flexible in terms of funding.

d. Tax Efficiency: The growth within a child's life insurance policy is tax-advantaged. This means that you won't face tax liabilities when accessing the cash value for education, whereas RESP withdrawals may be subject to taxation.

e. No Impact on Government Assistance: RESP savings can affect a student's eligibility for government assistance programs. A child's life insurance policy does not impact eligibility for financial aid options if needed.

f. Lifetime Coverage: The child's life insurance policy provides lifelong coverage, ensuring that the policy remains in force regardless of their educational choices.

g. Estate Planning: In the unfortunate event of the child's passing, the life insurance policy's death benefit can provide financial security to the family, serving as a valuable estate planning tool.

h. Ownership and Control: As the policy owner, you have control over the funds and can make decisions aligned with your child's financial needs and goals.

i. Potential for Growth: Life Insurance offers flexibility in investment options which can impact the policy's performance and see the cash value potentially grow over time, providing a substantial source of funding for college.

Family, father, mother, son and daughter playing together