Setting your (grand) children up for financial success!
When building a house, you start with a solid foundation before you start framing the structure. Below are two ways your child’s (grandchild’s) financial foundation can be set up for success.
Option 1A – RESP
A Registered Education Savings Plan (RESP) can be part of every family’s financial plan. The Government will contribute 20% of your contributions up to $500/year. You contribute $2,500 and $3,000 is invested in a tax-deferred account. A 20% rate of return before the funds are even invested.
A $7,200 cap on government contributions up until your child turns 18.
You can contribute up to $50,000 per child and have 35 years to use the funds.
When your child goes to post-secondary school the income received is taxed in their hands (little or no tax consequences as they are not likely earning much while attending school).
One minor drawback, if your child does not attend a qualified post-secondary institution and you want to close out the account all grants received and any investment growth those funds received are returned to the government.
Your contributions are not taxed, however any investment growth earned on those funds is considered interest income and is taxed accordingly.
Option 1B – Permanent Life Insurance
Purchasing a cash value life insurance policy also has a tax deferred investment account built into the plans structure. While there is no government grant, there is also no $50,000 lifetime contribution limit or restriction on what the funds can be used for.
- Help Start a business (Walt Disney (Disneyland), Ray Kroc (McDonalds) both leveraged their WL policies and they did alright)
- Down payment for their first house.
- Funds to travel. The world will be open by then.
- Buy their first car.
- Help pay for any type of education.
Also, your child now has the added benefit of being insured no matter their health, occupation, or hazardous hobbies they take on in the future. This factor is often overlooked until too late for some. Giving the gift of guaranteed insurability is priceless.
Example:
Contribute $2,500 per year for 17 years from birth into each product. Assume a 5% annual rate of return and no additional contributions.
RESP plan with $42,500 in contributions will be worth $86,000 (Including $7,200 Government Grant) by the time your child goes to school. This is the best option available to pay for tuition and other eligible expenses.
An example illustrating Participating Whole Life Values are noted below using $42,500 in total contributions. The cash value can be accessed at any time for any purpose. This is your asset and you have control over the use of the funds. In addition your child has a death benefit that continues to grow every year.
| Year | Participating WL Cash Value | Participating WL Death Benefit |
|---|---|---|
| 18 | $44,163 | $322,171 |
| 25 | $63,351 | $369,600 |
| 30 | $78,677 | $409,467 |
| 35 | $99,828 | $447,076 |
| 40 | $126,036 | $483,383 |
| 45 | $158,365 | $519,503 |
| 50 | $197,538 | $556,579 |
| 55 | $245,828 | $595,278 |
| 60 | $304,427 | $636,505 |
| 65 | $373,813 | $681,334 |
