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Insurance doesn’t always work for young people, especially children. Some say, “The premiums are low, so why not insure?”

If I buy my three-year-old niece life insurance, I may have helped her by locking in her insurability, and the life insurance will go to her family if she dies.

That’s helpful, but I’d rather give her money she can use while alive, so I suggest starting her an RESP instead.

Even so, some of your clients might have children whose relatives have given them life insurance.

Gifts of insurance

If that’s the case, at age 18 or 19 the child can either convert that policy to five times the amount of coverage, or cash out.

We recommend people cash out if they’re healthy, since they can use the funds to pay off education debt, or buy a first home.

To fill the insurance hole left by that cash-out, those clients can buy a $500,000 renewable and convertible term policy for as low as $25 per month.

If we go that route, we always make sure the term policy goes in force before cashing out. And since the young person is usually in a lower tax bracket, he’ll be able to get most of the cash value tax-free.

For young adults

Young people don’t need life insurance until they have a mortgage or a child. Or, a working spouse might need life insurance if she has a very high income and her partner doesn’t work; this protects the spouse if she dies.

Otherwise, living benefits (disability insurance, critical illness, and mortgage insurance) are better suited for young adults. Some products combine these into one policy, and others return premiums if the client doesn’t contract any life-threatening diseases during the term.

When someone does need life insurance, we recommend Term 10 because it’s cost-effective. Some advisors sell Term 20 right away, because the premiums aren’t much higher.

But usually life circumstances for people in these age groups change within two-to-five years: a client will have a second child or want to upgrade from a condo or apartment to a house. It’s at that point you’d convert, taking into account these new needs.

DI starts to get pricier after age 30; more so for people in occupations where there’s a greater chance of getting hurt on the job, such as construction.

People working in large corporations often have access to group DI, usually covering two years off the job. So it’s not usually necessary to purchase additional coverage.

But in today’s economic environment, many young people either work for themselves or for companies that don’t offer benefit packages.

If someone is making more than $25,000 per year, she should consider DI. After all, if she has a degree, her most valuable asset isn’t her car or home; it’s her future income.

If your client has DI through work, she can get $100,000 CI coverage, with 100% return of premium if she doesn’t claim, for $70 a month until she’s 75.

CI is a great fit for young people because many bounce from job to job, and CI isn’t tied to occupation. It also doesn’t get pricier until age 40.

Caroline Hanna, investment advisor, BA, CIM, National Bank Financial Wealth Management & Dave Pettenuzzo, insurance advisor, National Bank Financial

Originally published in Advisor's Edge