Dave and Amanda are a young professional couple aged 36 and 33 with 2 young children aged 1 and 3. After the birth of their second child they decided it would be prudent to create a savings plan for their children's education and automatically defaulted to opening an RESP account for each of their children with a group RESP provider specializing in that area of expertise.

They were excited at the prospect of the government offering them a further 20% grant towards the money they would be contributing. However, there were a couple of facts that they weren't aware of when deciding on the RESP as the only viable alternative for this type of saving.

Firstly, the maximum grant available to Canadians is $500.00/yr or a maximum of $7,200.00 over the duration of an RESP account before maturity. The other important consideration is that many RESP carriers have very strict rules associated with the redemption of an RESP for education. The funds in many cases can only be applied towards institutions which are sanctioned by the carrier and many private colleges might be exempt from coverage. Secondly, if the child or children decide against going to university or college, they might have to forfeit a percentage of the accumulated monies as well as incurring penalties.

The other option is to consider purchasing a whole life insurance policy which offers a permanent life insurance contract which could be paid up in as little as 10, 15 or 20 years. This policy has guaranteed cash value accumulation over time and the cash which accumulates in this type of insurance contract could be accessed in a few different ways with no restriction at all on how the money is used and when it is redeemed. If one compares the growth of an RESP which is funded for 20 years at a growth of 4% annually with the growth of the cash value within a whole life policy, one comes up with $95,000.00 for the RESP vs. $136,000.00 for the whole life contract, based on comparing monthly contributions of $200.00/m over the same time period (20 years). Additionally, the cash accumulation in the whole life policy keeps increasing over time and can be used for different purposes such as funding a down payment on a home, starting a business or helping fund retirement later on. The RESP is an effective way to save for children's education, but the savings must be used for one purpose only - to fund their education or else penalties, taxes and CESG grant repayment might be required.

The most practical decision for Dave and Amanda is to consider funding both a small RESP and a whole life insurance policy, which offers much more flexibility and overall benefit than the RESP alone.