Children’s Life Insurance vs College Savings: Which is Better for Your Family in 2025?

Did you know Canada’s average undergraduate tuition fee for 2025 is $7360? With figures this high (and they will likely go higher), it’s no wonder parents are constantly seeking ways to secure their children’s future and save for their education.

From our experience as an Insurance Broker, parents often compare different methods of saving money. Planning for what’s best for your family is always smart, and we would be happy to assist.

Now, when it comes to children’s life insurance vs college savings, which one is better? That’s a good question, and we’re about to find out in this article.

Short Summary

• Children’s life insurance offers guaranteed insurability and potential cash value growth 
• College savings plans, particularly RESP, offer tax-free growth and withdrawals for qualified education expenses
• Starting early with either option is crucial due to the power of compound interest
• College savings plans are more flexible for education-related expenses but may have penalties for non-qualified withdrawals
• Children’s life insurance provides a safety net and guaranteed returns, while college savings plans are subject to market volatility
• Both options have different tax implications and estate planning considerations
• Combining both strategies might be ideal for balancing protection and future opportunities
• The choice between the two depends on individual family circumstances, financial goals, and risk tolerance

Children’s Life Insurance Explained

Let’s discuss children’s life insurance policies before comparing them with college savings. 

What is it exactly? Simply put, it’s a life insurance policy for your child, but there’s more to it than you might think.

Permanent Life Insurance And Term Life Insurance

There are two main types: children’s permanent life insurance and children’s term life insurance. 

Children’s permanent life sticks around forever (unless cancelled), while children’s term life insurance policy covers a specific period. In most cases, we always suggest permanent life. An example of term life can be a children’s whole life insurance.

One big advantage is locking in insurability. If your child develops health issues later, they’re already covered. Some policies also build cash value over time, which is a nice bonus.

Depending on the policy and coverage, you’re looking at anywhere from $5 to $50 per month.

Is children’s life insurance right for you? That’s a personal call. It’s worked well for many families we know of. The most important thing is doing what’s best for your family.

Exploring College Savings Options

Let’s talk about something keeping most parents up at night – figuring out how to save for our kids’ college education. 

Popular College Savings Vehicles 

The cost of education is rising, but thankfully, there are a few investing options to help us. In addition to these options, children’s life insurance coverage can also play a role in your financial planning strategy.

First up are Registered Education Savings Plans (RESPs). These have become our go-to options. We love that we can contribute up to a maximum of $50,000 per child.

Plus, the government chips in with the Canada Education Savings Grant (CESG), matching 20% of our contributions up to $500 annually (capped at $7,200 lifetime). It’s like having the government as your savings buddy against the rising cost of tuition.

Other post-secondary savings options could help prepare your children for university. But when all is said and done, they are secondary players.

Next up, we have the Tax-Free Savings Account (TFSA). Some families still overlook this one for education savings because it’s not specifically designed for that. But for some families, it’s a great choice, especially if you want more flexibility or have maxed out on your RESPs.

You can contribute up to $7,000 as of 2025, and the growth is tax-free. Plus, you can withdraw the money for any purpose without penalty – whether for university tuition or a gap year for a backpacking trip.

Don’t overlook the humble Regular savings account. We opened one for each of our children when they were born. It’s not fancy, but it’s a great way to save birthday money from grandma or that $20 they earned helping with chores.

The interest rates aren’t anything to write home about, but it’s a safe place to keep small amounts and teach your kids about saving.

A High-interest savings account (HISA) can be a great option for those looking for more growth. Some online banks offer HISAs with interest rates that keep up (most of the time) with inflation.

You can use HISA as a complement to RESP. It’s perfect for short-term savings goals, like textbooks or a new laptop when your child starts university.

Benefits Of Starting Early With College Savings

Now, let’s talk about the benefits of starting early. We can’t stress this enough – time is your best friend regarding college savings. Compound interest is a powerful thing, but it needs time. 

For example, if you start saving $200 a month when your child is born, assuming a 4% annual return, you could have around $63,118 by the time they’re 18. On the other hand, if you start when your child is 10, you’d only have about $22,583. That’s a big difference!

Potential Tax Advantages Of College Savings Plans

One thing that excited us about these plans was the potential tax advantages. With an RESP, your contributions grow tax-free.

Plus, when it’s time for withdrawals, only the growth and CESG are taxed under your child’s tax return, which is a huge saving for parents. Some provinces even offer additional grants.

Flexibility And Control Over Funds

Here’s a myth: If you put money into an RESP, that money will be locked. It turns out that’s not the case at all!

These plans offer more flexibility than we thought. You can change beneficiaries and use the funds for various post-secondary education programs, including trade schools and apprenticeships. If your child gets a full-ride scholarship (fingers crossed!), you can transfer the RESP funds to another child or even into your RRSP.

Impact On Financial Aid Eligibility

Now, let’s talk about the elephant in the room – financial aid. We were worried that having an RESP would hurt our kids’ chances of getting financial assistance. But here’s the scoop: while RESP assets are considered in financial aid calculations, the impact is often less than you might think. 

Many provincial student aid programs have provisions to ensure that RESPs only partially penalize students. Plus, the benefits of having savings often outweigh any potential reduction in aid.

Cash Value Potentials for Children’s Life Insurance vs College Savings 

Growth is one of the biggest factors when choosing between university savings or children’s life insurance. So, let’s dive into the nitty-gritty of growth potentials. 

Projected Returns On Children’s Life Insurance Policies

When people first look into children’s life insurance policies, the growth might not stand out because 1-3.5% is considered a healthy estimate of the annual returns for most children’s life insurance policies. But remember, there are other benefits such as insurability, cash account, life benefits, and tax benefits to name a few examples.

Historical Performance Of College Savings Plans

With RESPs, some aggressive growth portfolios have seen average annual returns of 6.26% over the long term.

Impact Of Compound Interest On Both Options

Here’s where things get interesting – compound interest. It’s like a snowball rolling down a hill in Whistler, getting bigger and bigger. We’ve seen this in action with RESPs. Starting early and letting that compound interest work its magic can lead to some seriously impressive growth.

Children’s life insurance policies also benefit from compound interest, but typically at a lower rate. This is a safer option in the long term.

Consideration Of Market Volatility And Guaranteed Returns

Here’s where children’s life insurance throws a curveball – guaranteed returns. While the overall growth might be lower, a portion of the cash value growth is guaranteed. It’s like having a safety net. During market downturns, we found some comfort in knowing part of our investment was protected.

RESPs, on the other hand, can be volatile. Don’t be surprised when you’ll have years where your RESP grows by double digits and others where it dips into the red.

But here’s what we’ve learned – diversification is key. We ended up using a mix of both options. Some money in a conservative RESP for steady growth, some in a more aggressive RESP for potentially higher returns, and the rest in children’s whole life policy for that guaranteed element.

Assessing Your Family’s Financial Goals and Priorities

The best way to develop a plan is to think long and hard about your goals. 

Evaluating Your Family’s Current Financial Situation

First, you’ll want to look at your current financial situation. Pull out all your bank statements, credit card bills and even that shoebox of receipts so you can see the entirety of your finances.

You’ll also want to list your income, expenses, debts, and savings.

Considering Your Child’s Future Aspirations

Next up, we had to think about our children’s future aspirations. This part was pretty fun! We sat down with them and had some great conversations about their dreams. Of course, as adults, we know that a kid’s dream right now might not be what he wants in the future. 

We realized that while we can’t predict the future, we can prepare for various possibilities. Whether it’s vet school or starting a business at 18, we wanted to be ready for anything.

Balancing Short-Term And Long-Term Financial Objectives

Now, this is where it gets tricky. We had to balance our short-term needs (like paying for braces and such) with our long-term goals (retirement). 

We decided to take care of important needs first while saving a portion for our long term goals.

Importance Of Overall Financial Planning And Diversification

We learned from client stories that putting all your eggs in one basket is a recipe for disaster. We used to think having a savings account was enough, but it’s not.  

Now, we’ve got a mix of investments – some in an RESP, some in retirement accounts, different insurance accounts, and even a little in a high-yield savings account for emergencies. It’s like having a financial safety net. Sure, it took some time to set up, but the peace of mind is priceless.

Tax Implications and Legal Considerations

Having a clear understanding of tax and legal considerations can help you to make smart financial choices. So, let’s get right to it. 

Tax Treatment Of Children’s Life Insurance Policies

Let’s start with children’s life insurance policies. One important thing to know about the cash value growth in these policies is that they are tax-deferred. That means you only pay taxes when you withdraw from the policy. 

It’s important to know that if you surrender the policy and the cash value exceeds what you paid in premiums, you might owe taxes on that difference. Keep in mind this is an edge case since most people don’t surrender their policies.

Tax Benefits of Education Savings Plans

With an RESP, your contributions grow tax-free. 

And when you withdraw the money for qualified educational expenses, only the growth portion and government grants are taxed under your child – usually at a much lower rate. 

Estate Planning Considerations

In estate planning, both children’s life insurance and RESPs can play a role. Life benefits are generally tax-free to the beneficiary.

And with RESPs, you can contribute up to $50,000 per beneficiary in a lump sum without triggering tax consequences. That’s a mouthful, but it means you can move money out of your estate faster.

We recommended spreading contributions over time to maximize CESG benefits rather than making a lump sum contribution.

And while contributing $50,000 at once won’t trigger immediate tax implications, it will likely impact CESG eligibility. The CESG is only paid on the first $2,500 of contributions per year (or $5,000 if there is unused grant room from previous years).

Ownership and Beneficiary Designations

Last but not least, let’s talk about ownership and beneficiaries. For life insurance, we learned that it’s usually best for a parent to own the policy on a child. For RESPs, the subscriber (usually a parent or grandparent) maintains control of the funds, even when the child is in college.

We always tell people to carefully designate their beneficiaries and keep them updated. Life changes and your beneficiaries should reflect that. For RESPs, we also recommend naming a successor subscriber so you can change beneficiaries if something happens.

Flexibility and Access to Funds

Alright, let’s chat about flexibility and access to funds. This is interesting, so don’t sleep on this section. 

Borrowing Against Life Insurance Policies

With a whole life insurance policy, you can borrow against the cash value. It’s like having a secret stash of funds.

Just make sure you follow the repayment plan.

Withdrawal Options for Education Savings Plans

With an RESP, you can withdraw funds when it’s time for post-secondary education.

Just make sure it’s covered under the qualified education expenses.

Penalties for Early Withdrawals or Non-Qualified Expenses

For RESP, if you withdraw the contributions for non-educational purposes, you’re okay – that money is yours. 

But if you withdraw the earnings or government grants for non-educational purposes, you’ll have to repay the grants and pay taxes on the earnings.

With life insurance, if you surrender the policy, you might have to cover surrender charges and potential tax implications on any investment gains.

Transferability of Benefits to Other Family Members

Here’s a cool feature we discovered – both children’s life insurance and RESPs offer some transferability. With an RESP, you can change the beneficiary to another qualifying family member. So, if one child doesn’t need all the funds, you can use them for another child or even for yourself if you decide to go back to school! 

Just remember, there might be some restrictions if the new beneficiary is older or not a sibling of the original beneficiary.

For children’s life insurance, you can transfer ownership or change beneficiaries with certain policies. Just remember that transferring ownership might have tax implications.

Talk to an Experienced Professional

Choosing between children’s life insurance and college savings in 2025 isn’t a one-size-fits-all decision. It’s about balancing the needs and goals of your family. 

From our experience, RESP is a great savings vehicle for sending your children to university. While children’s life insurance is a great way to keep your child insured and have money in the future for their needs. The best option is to go with both RESP and children’s life insurance.

Talk to an Insurance Broker in Vaughan and have them assess your insurance and figure out what’s best for you.