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Whole Life or RESP: Which Option is Best?
Whole Life or RESP: Which Option is Best?
When it comes to your child’s future and education, planning for this can often seem daunting but it surely doesn’t have to be. Two options are readily available for you and your child with one being the most common and the other growing in popular demand. Registered Education Savings Plan (RESP) and Whole Life Insurance respectively. Today we are going to dive into these two options, comparing and contrasting them to see which option is best, whole life or RESP?!
What is an RESP?
The Pros and Cons
Well, there are some caveats that you should be aware of. For instance, your invested money can only be used by the Government of Canada’s approved post-secondary list of schools which can change at their whim. The post-secondary education system is changing rapidly with online learning, entrepreneurship, and other avenues to continued education. It will be interesting to see what post-secondary looks like in 18 years and which avenue your child chooses to take.
Now to look at the tax consequences. RESPs are paid for with taxed money and when withdrawn taxed to the beneficiary. If the RESP is not used or partially used all remaining grants must be paid back and you will be taxed on the full withdrawal at your marginal tax rate plus 20%, a pretty costly experience. There is an option to roll it over to your RSP up to $50K if you have the room to avoid some of these taxes.
RESPs are a great option if you know your child will be attending an approved post-secondary institution, to help offset some of the rising school costs but they may require additional savings.
What is a Whole Life Insurance policy?
Whole Life insurance is a life insurance policy that has an investment component built into it. This type of insurance is an alternative investment with more flexibility. There’s virtually no limit to the size of investment in their whole life policy, and most importantly, no restrictions on what the cash or a policy loan can be used for.
Whole Life policies can be paid up in 20 years or even shorter depending on the policy. The values grow each year tax-free and vest permanently to the contract. The policy owner controls how the policy cash values are used and who the beneficiary is, ensuring the money can’t be misused. A great aspect of these policies is that they grow at a very steady rate, roughly 6% currently, and are not affected by the markets like an RESP can be.
How does Whole Life Compare?
Whole Life policies offer a unique aspect in their flexibility. The investment is yours and there are no rules or regulations governing you and how to use this investment. Common uses or multiple uses are:
- Funding university, college, or post-secondary training
- Starting a business
- Purchasing a first home
- Purchase of a vehicle
- Emergency income
- Serving as a pillar of retirement income
Whole life provides your child with a policy that ensures their ability to be approved for insurance. It happens fairly often when a young adult who now needs insurance is unable to get it or it becomes too costly due to underlying health risks or choosing a career in a high-risk profession. Some examples of this are:
- Firefighter
- Airline/pilots
- Iron & steel workers
- Dangerous sports enthusiasts (avalanche risk areas, racing, bull riding)
- Farm workers
It also provides an avenue for your child to self-bank. Once they come of age the policy can be transferred over to them when they can now invest and lend against their policy or use the cash value for other purchases they may need in the future. Additionally, they can use these policies for a dividend payment in retirement to supplement their income. A tax advantage far greater than a simple RESP. Lastly, It will also provide a guaranteed payout to their children when they eventually pass.
The Final Word
Whole Life or RESPs: both have their pros and cons, the latter offers more flexibility. If your child decides not to pursue higher education or chooses a different path, a whole life insurance policy provides more financial options. RESPs provide additional investment in form of grants. In a perfect world a mixture of both options is ideal for your child.
For more personalized advice and guidance on whether RESP or Whole Life Insurance is the right fit for your family’s future financial planning, don’t hesitate to reach out to us. Our team at First Avenue Financial is here to assist you every step of the way.
Contact us today at First Ave and let us help secure your child’s financial future.
