An RESP is an effective way to save for a child’s education. But the savings must be used for a single purpose: the education of the student (otherwise, taxes, penalties, and/or repayment of the CESGs could result).
If you choose to insure the life of a child or grandchild, the cost of the insurance will be low, and the savings accumulated over the years can be used to help pay for an education, among other things.
Consider these numbers: If you were to contribute $200 each month to a participating whole life insurance policy on the life of your child, starting from their first year of life, you will have accumulated $65,235 (the cash value of the policy) in 20 years (assuming a current dividend scale of 6.35 per cent annually). These funds could be used to help pay the cost of an education. Alternatively, the funds could continue to accumulate in the policy and would be worth $112,612 at the age of 30 (this could make a helpful down payment on a home), $198,433 at 40 (perhaps to help start a business), and $,102 at 65 (perhaps to help your child meet costs of retirement).
You always need to compare an investment like this to the alternatives like a registered education savings plan (RESP). If you were to invest the same $200 each month in an RESP for 20 years, collect the maximum Canada Education Savings Grants (CESGs) along the way (equal to 20 per cent of RESP contributions to a maximum of $7,200 for each student), and chose investments that are of the same risk level as the whole life insurance policy (fixed income risk), you’d end up with about $95,150 in the RESP after 20 years (assumes an average rate of return of 4 per cent).
Note: The figures used above are only for illustration purpose and are not guaranteed.
I can help you make the decision whether a whole life policy or RESP is the best fit for your child’s education.