What is better for your child’s future: the Registered Education Savings Plan (RESP) or Participating Whole Life?
The RESP and Participating Whole Life Insurance are both tax-advantaged financial products that can achieve a similar result. Let’s look at each option and which is best for your child’s future.
RESP
Purpose
The RESP is designed specifically to help parents (or grandparents) save for a child’s education on a tax-advantaged basis.
Taxation
Contributions to the RESP are not tax-deductible, but the investment grows tax-deferred. When the beneficiary (child) withdraws funds for educational purposes, the earnings are taxed in their hands, typically at a lower tax rate.
Government Grants
The Canadian government provides grants such as the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB) for modest income families. There is also a one-time BC Training & Education Savings Grant (BCTESG) for $1,200. Between the CESG and the BCTESG, the RESP can be boosted by as much $8,400 in matching contributions.
Withdrawals
Withdrawals from the RESP will, ideally, be taxed as income in the hands of the child once attending post-secondary school. Because they will seemingly be in a low tax rate at this time, the impact of the income will be insignificant.
Lifetime Limit
There’s a lifetime contribution limit per beneficiary for the RESP of $50,000.
Whole Life Insurance
Purpose
Whole Life Insurance provides coverage for the entire lifetime of the insured individual. It combines a death benefit with a savings or investment component, called the cash value.
Cash Value
Whole life policies accumulate cash value over time, and this gets expedited by re-investing the dividends paid by the insurance company right back into the policy. In addition to the compounding effect, there is no annual tax reporting required.
Costs (Premiums)
When setting up the policy, the parents will commit to a monthly amount to deposit and a length of time they want to pay for. Typically, this is for 10, 15 or 20 years.
Accessing the Cash Value
Policy ownership can be transferred to the child once they reach 18 or 19, and they can use the policy’s cash value to fund their post-secondary education. Cash value can be accessed by withdrawal, loan, or leverage.
Investment Management
The insurance company oversees the cash value growth, so this is a “hands off” approach for the parents.
Choosing Between RESP and Whole Life Insurance
The RESP is the best way for parents to save for their child’s education due to the government grants and flexibility when contributing. However, if the child does not attend an eligible institution, the grants must be repaid and the RESP wound up. This is not an ideal outcome and a scenario that would ultimately favour Whole Life – the cash value can be used for any purpose (first car, first home, university), so there is a lot more flexibility for different life paths.
For high earning households or in situations where both parents and grandparents want to contribute, it is common to see BOTH the RESP and Whole Life used. This way you are taking advantage of available government grants, while also providing the child with a flexible asset to be used later in life.
We specialize in both RESPs and Whole Life Insurance, so for more information or to get started, contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca.
DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.