Last week we brought you part one of what the Canada Child Benefit is. We helped you figure out how much you may be receiving. If you haven’t read part one, you can find it here. In the previous post we talked about Registered Education Savings Plans and Life Insurance for your child. In this post, we are going to discuss the final two items to spend your Canada Child Benefit on. In closing, we will wrap up all four items in a case study so you can see it at work.
Critical Illness Insurance
Continuing on the discussion of insurance for your child, as Critical Illness Insurance is often overlooked. Many people have either not heard of Critical Illness or they have never had an understanding of what it is. Simply put, Critical Illness provides a tax-free cheque to the parents of a sick child. There are certain conditions that are covered, but the biggest are Life Threatening Cancer, Cerebral Palsy, Muscular Dystrophy, Bacterial Meningitis, etc. (a full list from a typical insurance company can be found here).
So why would this be important? No one wants to think of their child getting sick. No one wants to think of making money when their child is sick. The reason it is important is because many health plans both private and provincial do not cover such things as traveling to the hospital, taking time off of work, staying in a hotel, wheel chair ramps, hiring help at home, flying in family members to help out, extra daycare for the child that isn’t sick, etc. The list goes on. Remember, that for us living in the great province of New Brunswick, our closest children’s hospital (which is a wonderful hospital) is in Halifax, NS. Travel and lodging and time off of work becomes a big, big issue.
The primary function of this type of insurance is to keep your family’s faces off of a pickle jar at the local gas station. But some secondary options are also available. These options can provide conversion to an adult plan for the child. Meaning they keep the coverage into adulthood should they ever get sick and their family needs the cash. Another option is that you can actually receive 100% of your premiums back at age 25. There is no interest on your money, but it would certainly make sense if you can use your increased cash flow from Mr. Trudeau.
Family Contingency Fund
One important thing that should be in place is a family contingency fund. We can call it an emergency fund but contingency fund sounds better I think. Straight up, this is a fund to be used only when needed. You and your spouse should define specific reasons why this money should be used. It is not to be used because the couch is getting old. This is a last resort next to hauling out the credit card for something that is urgent and NEEDED (not wanted).
To start, put enough away that you will have $1000 in 6 months. That’s about $167 a month to start off. Then, continue to put $50-$100 each month to build it up. Try to never let the pot drop below $1000. Remember, this could be your deductible for your home insurance should something happen to your home. Or it could be the refrigerator that just stopped working that helps your family EAT!
Canada Child Benefit – Photo Credit Servicecanada.gc.ca
The Final Verdict (Case Study)
Now that you have had a brief on the 4 things you should do with your Child Benefit money, let’s get to the numbers. Below you will see a case study with the example that we started with. 1 child under six, and receiving about $315/month. Let’s make the assumption that that child is a 1-year-old female with no current health concerns (it may also be important that the parents and possibly grandparents do not have hereditary conditions).
Life Insurance: $75,000 Whole Life (with $150,000 Guaranteed Insurability Benefit) = $59/month*
Critical Illness Insurance: $75,000 with Return of Premium (at age 25) = $47/month**
Family Contingency: $167/month for 6 months
Education Plan: $42/month until 6 months are up, then switching to $200/month***
At Age 18: Education Plan would have over $50,000 in it
At Age 25: Critical Illness Return of Premium would amount to over $13,500
At Age 25: Cash value of life insurance would amount to over $21,000 (and the death benefit would have already increased to over $179,000)
In this scenario, we have protected your family in the event of a sudden loss, sudden sickness, as well as a disaster that could hit your household. We have also saved a great chunk of money for your child’s education. We have also provided the option to have over $34,000 to use in their twenties for a down payment on a home, a wedding, start a business, etc.
Although this scenario isn’t the answer for every family, it is certainly worth taking a look at. I feel that we have put this tax-free money from the government to good use and is now truly benefiting and protecting your family from now and in the future. Be sure to discuss this scenario with your financial advisor. If you do not have and advisor, certainly reach out to me to see if this is will work for your family.
*In this example, we used the Great West Life Enhanced Legacy Participating Whole Life Policy at 2016 current dividend scale
**In this example, we used the Great West Life Child Oasis Critical Illness Insurance Plan with Return of Premium at expiry. This policy is convertible to an adult product upon expiry.
*** Assuming a full 20% match and 5% annual return compounded.