Families who expect to max out contributions to a registered education savings plan (RESP) early in a child’s life might consider life insurance as another option to help save for their education.

Parents can buy a whole life insurance policy for the child and pay the premiums, which are usually quite low for kids. (Advisors note that premiums are generally higher for males compared with females, regardless of age, because of actuarial calculations related to risk.) Some policies also enable clients to make additional payments, within limits.

The policy’s cash value can be invested and grow on a tax-deferred basis. Then, when the child is 18 or older, policy ownership may be transferred to the child without incurring any tax consequences. Regardless of who owns the policy, the accumulated cash value can be withdrawn or used as leverage for a policy loan or bank loan to cover post-secondary education expenses. Each choice has different tax implications.

A significant benefit of insurance is that, unlike an RESP, no part of it is limited to paying for qualifying education expenses. That means the cash value can help pay for a wedding or down payment on a home if the money isn’t needed for education.

Not a replacement for an RESP

Kelly Ho, partner with DLD Financial Group Ltd. in Vancouver, says the insurance option is best suited for clients who have the financial means and flexibility, and understand it’s not a set-and-forget investment strategy.

“It’s a very long-term strategy that can be very advantageous,” she says, adding it’s “by no means a replacement for the RESP, which is by default the go-to plan for post-secondary savings.”

She says conversations about using life insurance for education expenses often start when parents have extra funds available or receive gifts for children from other family members, such as grandparents.

Ms. Ho says parents like that they own the whole life policy for as long as they choose, versus an in-trust account, of which their children take full control when they reach the age of majority.

When Ms. Ho uses the life insurance strategy, she looks carefully at the policy’s terms and conditions, including plan limitations, maximum contributions, flexibility to accommodate life changes, and what happens if parents can’t afford to contribute to the policy at some point in the future.

“There are some plan designs where there’s a definite end date,” she says, such as 10 or 20 years. “There are also policies [with] characteristics in the contract where if you fund it for a certain number of years, there’s a high likelihood that the policy can continue self-funding for the duration of its life – but it’s not guaranteed.”

Sorting through these details is crucial when advisors consider using life insurance to fund educational costs. Ms. Ho also says that, as children get older, they should be taught to understand the value of their policy, why it was set up, what it can be used for, and why they may or may not want to continue funding it.

Ms. Ho says parents who want to have more than one child should also consider whether they want to use the same life insurance strategy for each one.

Andrew Feindel, portfolio manager and senior wealth advisor with Richardson Wealth Ltd. in Toronto, has used life insurance for a handful of clients who already have whole life insurance on their first child and wanted to buy an equivalent policy for the second.

Despite being a believer in the value of whole life insurance and owning a policy himself, he doesn’t have whole life policies on his own children and generally doesn’t recommend it.

He says the death benefit usually ends up providing a very strong rate of return, but there are often better options available if the primary goal is to grow investments.

“I always call it an A+ investment on your estate and a B investment in your lifetime,” Mr. Feindel says.

Even after 20 years – roughly the point at which a child would need to access money to pay for post-secondary education – the growth of the cash value will likely translate into a very modest rate of return.

Considerations for cash value withdrawals

Parents also need to consider the cost of getting the money out of a whole life policy. Cash value withdrawals are taxed in the hands of parents as long as they own the policy, and they may decrease or eliminate the death benefit. A policy loan or bank loan that uses the policy as collateral protects the death benefit, but incurs interest charges. Importantly, if the client doesn’t repay the loan, they could end up with a cost amounting to decades of compound interest, Mr. Feindel warns.

Another option is to arrange for annual dividends to be paid out of the policy, but as he points out, “unless you have a very big whole life policy, that likely is not going to give enough to pay for tuition.”

Chris Warner, wealth advisor with Nicola Wealth Management Ltd. in Victoria, also says that funding education shouldn’t be the primary reason for buying whole life insurance – but it can be a nice side benefit.

He suggests, as an example, an affluent family that contributes $50,000 a year to a whole life policy insuring the life of a newborn. By the time the child is 18, this for‑illustration‑purposes‑only policy may have a death benefit of roughly $2‑million and a cash value of roughly $500,000. However, he says, what if the child only needs $50,000 to top up education savings in an RESP? Withdrawing that amount may decrease the death benefit to, say, $1.7‑million, but then it will continue to grow.

“We’ve taken money out, but it’s not impacting the primary need, which is building up [the death benefit] and tax sheltering … and ancillary benefits such as the ability to leverage [the policy] and creditor protection,” Mr. Warner says.

In general, though, when clients are looking to save for a child’s education, he recommends maxing out the RESP first, then maxing out the parents’ tax‑free savings accounts, investing within a non‑registered investment account, or (if parents accept giving up control the moment the child reaches the age of majority) investing within an in‑trust account.

“Insurance can provide some interesting side benefits outside of just life coverage, but insurance is almost never the best savings vehicle for unspecified expenses (at least as measured by IRR [internal rate of return]),” Mr. Warner says.

ALISO MACALPINE –  THE GLOBE AND MAIL
PUBLISHED SEPTEMBER 22, 2025