A client recently posed an interesting, thought-provoking question, which we think is worth sharing. The question was: “My elderly dad would like me to take over the policy on his life. Is there any merit in this?”

The story goes like this: “During a recent conversation with my 80-year-old father, he suggested I take over the payment on his life insurance policy. For him, the monthly premium cost of the life policy makes up a large portion of his day-to-day budget and is now becoming unaffordable. My mother passed away 10 years ago and I am not certain why he still has this policy in place as he has no liabilities or dependants. He has been paying this premium for many years and does not want to cancel it. ‘Someone should benefit from this investment,’ he says. ‘It may as well be you.’”

Is it worth considering?

The question of whether to take over the premiums on your 80-year-old dad’s life cover as an ‘investment’ is certainly worth considering, but firstly, is life insurance actually 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 dad’s estate and whether liquidity is needed, let us assume that it is not an issue. Let us also assume that your dad is not dependent on you.

In this scenario, one can then simply look at it as an expected premiums payable versus ultimate life cover pay-out.

But firstly and importantly, you need to check that your dad has a “whole of life” policy and not a “term” policy which would terminate automatically at some point in the future. That would be disastrous for you. If the term ends the cover falls away, and all the premiums you will have paid will be for nothing. Remember it is not an investment.

Secondly, you need to look at the premium pricing pattern and the escalation of the life cover over time. This means that you need to make certain the premiums are not going to escalate significantly above inflation over time. In many cases, premiums escalate by a far larger percentage each year than the benefit that is payable. It, therefore, starts becoming less and less appealing. You do not want to end up paying more and more each year (as the premium escalates) and then it becomes unaffordable for you too.

Of course, the big unknown is how long your dad will still live – and nobody can give you this answer.

To give this issue due consideration, one would need to build a spreadsheet based on the life expectancy of your dad against the escalations in premiums and life cover payable over time. It all really comes down to the numbers and affordability.

It is also worth remembering that any life cover on your dad’s life (even if you are the beneficiary) is deemed an asset in his estate and will attract 20% estate duty. This will therefore need to be factored into your spreadsheet calculations.

Lastly, the life cover will cease if there are any missed premiums. In general, life insurers will allow one missed premium and will notify the policy owner. If there are two or more missed premium payments, the policy will lapse and all those premiums you (and your dad) may have paid over the years will be for nothing. Do not let that happen!

Depending on your analysis, it may well make sense to take over the policy and either become the beneficiary or better still, get your dad to cede the policy to you so that you become the owner. It does feel a bit heartless discussing your own dad’s mortality – whether he is in good health and has a reasonable life expectancy or not. Ultimately, it all comes down to how long you will be paying the premiums – and that is the big uncertainty.

Life insurance and the elderly

Life insurance is normally acquired for a specific purpose – like the potential loss of earnings or where liabilities exist like bonds. Generally, younger people with debt and/or dependants have a very real need for life cover. As time passes and your children get older (and hopefully become less dependent) and your bond is slowly reducing, one is able to reduce the amount of life cover you need.

In our meetings with clients that are getting closer to retirement age, and have less debt and dependants, we generally start looking at reducing their life cover and redirecting this premium to discretionary savings (investment).

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

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

• Children that remain dependents for the rest of their lives – for example, children with an intellectual impairment are likely to outlive their parent(s) but do not have the capacity to work and earn an income. They need to be provided for after the parent(s) passes away. Life cover serves a purpose in this case.
• Older parents become dependants later in life and end up being funded by their grown-up children. This could be structured as a loan and keeping a life policy in place may well make sense to ‘repay’ the adult children. It is also an efficient way of reducing estate duty.
• Elderly folks that still have debt or loan accounts. It makes sense to keep a life 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 fixed asset (for example, property) at the wrong time in order to create liquidity for estate duty, masters and executors’ fees.
• Sometimes it makes sense to retain life cover on elderly folks’ lives where they are still party to a business enterprise. An example here is the case of children insuring their father in order to be able to buy him out of his business/farming enterprise. This creates liquidity for the surviving spouse and allows the business enterprise to continue with the children as the new owners.

In summary, there are definitely cases for keeping life cover on elderly folks’ lives. In some cases, there is a very real financial planning reason and in other cases, it is more of an ‘investment case’.

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

Article credit Taking over a parent’s life policy: is it viable? – Moneyweb