Maximize your baby bonus.

By Jennifer Poon, February 2, 2023.

Congratulations on your new bundle of joy! As you marvelled over their first smile or first giggle, you can’t help but think what they will grow up to be. You want this new baby to excel and seize their full potential and so responsible parents and grandparents begin to save and invest for the future. When I was a child, my mother put my baby bonus in a a savings account. And over the years, money I received from Christmas, birthday and Lunar New Year are deposited into this account and grew over time. We used that savings for university tuition and just like that, it was spent and I was left with $8,000 of debt when I graduated.

Nowadays, new parents flock to set up RESP. In my humble opinion, all legal means to grow my savings tax-free is gift from the government and I will always take full advantage! You can contribute to a Registered Education Savings Plan (“RESP”) for your child up to a lifetime limit of $50,000 and receives the Canada Education Savings Grant on 20% of the first $2,500 contribution, up to a maximum of $500 per beneficiary and a lifetime max of $7,200. The money will grow tax free until your child goes for post-secondary education. What’s the downside? Providers need to complete special registration to provide RESPs and investment options may be limited. If your child does not go for post-secondary education, withdraws less the original contributions are taxable. Most importantly, RESP is a savings plan, just like the savings account I had when I was a child. When you spend the money, that is the end of the story.

Consider life insurance for your child.

Buying whole life insurance for your child is a gift that keeps on giving, it is a tax-free savings plan that provides creditor protection but most importantly it can guarantee insurability for your child in the future. Insurance products that are covered under the Insurance Act of Canada receives tax-exempt status in the Income Tax Act. When you pay premiums, a portion of it goes to the cost of insurance and fees, then the rest goes into a tax-exempt investment accounts. Insurance products also provide certain creditor and family law protection so your savings are protected. Because the insurance company’s obligation is to pay your beneficiary a death benefit, your premiums are largely impacted by the insured person’s age and health. Buying a life insurance policy for your child has 2 main benefits: (1) your contributions can grow tax-free and some policy provides guarantees, (2) ensure your child will be insured should their future health condition decline.

Unlike a RESP, there is no maximum, rather the maximum coverage is based on your needs. When it’s time to draw your savings out, you can consider a policy loan or going to the bank to borrow against the policy. Insurance loans often gets more favourable borrowing rates than other loans because of the policy assignment. With a policy assignment, if your child cancels the policy or passes away, the insurance company will repay your loan first. This makes your child’s insurance policy one of the best piece of collateral any lender can ask for. Depending on your needs and/or affordability, you can consider either whole life participating insurance or universal insurance. Participating insurance pays a dividend rate and the cash surrender value is guaranteed, while universal life insurance provides flexibility in premiums, investment options and coverage. When your child become of legal age, you can transfer ownership of the policy to your child tax free. What’s the downside? You need to keep paying the premium on a fixed term or for the child lifetime.

Set your child up for the future.

None of us have a crystal ball but we have the best hopes for the future. Many of my friends have few limitations on their children, other than doing everything they can to make their children happy and teach them to be a good people. Buying life insurance for your child not only provides tax free savings but also ensure they can get the coverage they want in the future. In my world, there are a lot of planning opportunities with the strategic use of insurance and I am excited to help you reserve a spot for your precious little one.