Taking over a parent’s life insurance policy: is it viable?

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A client recently asked an interesting and thought-provoking question, which we think is worth sharing. The question was: “My elderly father would like me to take over the politics of his life. Is there any merit in this?

Here’s the story: “During a recent conversation with my 80-year-old father, he offered to take over the payment of his life insurance policy. For him, the cost of the monthly premium of the life insurance policy is a big part of his daily budget and now becomes unaffordable. My mother passed away 10 years ago and I don’t know why he still has this policy in place as he has no liabilities or dependents. He has been paying this bonus for many years and does not want to cancel it. “Someone should benefit from this investment,” he says. ‘That might as well be you.’

Is it worth considering?

The question of whether to take on your 80-year-old father’s life insurance premiums as an “investment” is certainly worth considering, but first, is life insurance really an investment?

The nature of insurance is that it is the payment of a premium that insures against a specific risk – in the case of life insurance, it is the risk of death. Therefore, insurance is NOT an investment.

Without knowing the details of your father’s estate and if cash is needed, let’s assume that’s not an issue. Suppose also that your father does not depend on you.

In this scenario, it can then simply be thought of as expected premiums to be paid over the ultimate life cover payout.

But first and foremost, you need to check that your dad has a “lifetime” policy and not a “term” policy that would automatically end at some point in the future. It would be disastrous for you. If the term ends, the coverage disappears and all the premiums you have paid will be for nothing. Remember this is not an investment.

Second, you need to look at the premium pricing model and the increase in life coverage over time. This means you need to ensure that premiums will not rise significantly above inflation over time. In many cases, the premiums increase by a much higher percentage each year than the benefit that is payable. It therefore begins to become less and less attractive. You don’t want to end up paying more and more every year (as the premium goes up) and then it becomes unaffordable for you too.

Of course, the big unknown is how long your father will live – and no one can give you that answer.

To properly account for this question would require creating a spreadsheet based on your father’s life expectancy versus increasing premiums and life cover payable over time. It really all comes down to numbers and affordability.

It’s also worth remembering that any life coverage on your father’s life (even if you are the beneficiary) is considered an asset in his estate and will incur 20% inheritance tax. So this will need to be accounted for in your spreadsheet calculations.

Finally, life coverage will cease if there are any missed premiums. Typically, life insurers will authorize a missed premium and notify the policy owner. If there are two or more missed premium payments, the policy will expire and any premiums you (and your father) may have paid over the years will be for naught. Don’t let that happen!

Depending on your analysis, it may be a good idea to take over the contract and become the beneficiary or, even better, to have your father assign the contract to you so that you become the owner. It’s a little cruel to discuss your own father’s mortality – whether he’s healthy and has a reasonable life expectancy or not. In the end, it all comes down to how long you’ll be paying the premiums – and that’s the big uncertainty.

Life insurance and the elderly

Life insurance is normally acquired for a specific purpose – such as potential loss of income or where liabilities exist such as obligations. As a general rule, young people in debt and/or with dependents have a real need for life insurance. As time passes and your children grow (and hopefully become less dependent) and your bond slowly diminishes, you can reduce the amount of life cover you need.

As we meet with clients who are nearing retirement age, who have less debt and dependents, we typically start to consider reducing their life coverage and redirecting that premium to discretionary savings ( investment).

I say ‘generally’ because not everyone is the same and not everyone has the same requirements.

Here are some curve balls that require thinking about keeping life cover in place for an elderly client:

  • Children who remain dependent for the rest of their lives – for example, children with developmental disabilities are likely to outlive their parents but lack the ability to work and earn an income. They must be taken care of after the death of the parent(s). Life coverage has a purpose in this case.
  • Older parents become dependent later in life and end up being funded by their adult children. It could be structured like a loan and maintaining a life insurance policy might just make sense to “pay off” adult children. It is also an effective way to reduce inheritance tax.
  • Seniors who still have debts or loan accounts. It makes sense to keep a life insurance policy in place for liquidity purposes.
  • For estate planning purposes – often an estate can be made up of illiquid assets and one does not want to have to sell a capital asset (e.g. property) at the wrong time in order to create cash for inheritance tax, masters and executors. costs.
  • Sometimes it makes sense to keep life coverage on seniors’ lives while they are still part of a business enterprise. An example here is the case of children insuring their father so that they can buy him out of his business/farm. This creates cash flow for the surviving spouse and allows the business enterprise to continue with the children as new owners.

In summary, there are certainly cases for keeping life coverage on the lives of seniors. In some cases there is a very real reason for financial planning and in other cases it is more of an “investment case”.

All of these cases require careful consideration of specific scenarios, then planning and implementation. Consulting a qualified and certified financial planner to help you ensure that you have covered all aspects may well be a good idea.

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