LIAM is about understanding life insurance and its applications. So let’s take a look at an application that maybe you haven’t thought of: insuring your parents.
The first thought that many people have on this is “That’s morbid!” Death is an inevitable part of life, and understanding that death will eventually come allows us to embrace life even more, to be able to plan ahead with clear thoughts instead of emotional reactions.
Life insurance is designed to create an estate at death, whether it is when you are thirty and have young children and a mortgage that need to be taken care of, or when you are eighty and have grandchildren. Assuming that Mom and Dad want to create a legacy to help their grandchildren or to assist grown children financially, life insurance is a smart financial planning tool. Let’s look at a case study.
Assume that Mom and Dad are 70 and have three kids. One of the kids is very successful, one is OK, and one is a financial mess because they just are lazy and has never grown up. Let’s for simplicity say that each of the kids has two kids, so there are six grandchildren. Mom and Dad are retired and aren’t going to worry about money, but aren’t lavish. They have “enough, but not too much”.
Successful son knows that ultimately his brother that is a mess is never going to be able to send his kids to college nor own a house because of his inability to be a financial grown up (he has no mental or physical disabilities, just lazy and made a lot of mistakes). The OK one will not be able to send his kids to school without a tremendous amount of student loans even though he is hard working and intelligent because of his career choice. The successful one is not concerned about his children’s education or his own financial future, but does not want to be his brother’s keeper for the rest of his life. So what should he do to make sure that he helps his relatives while not coddling or insulting them?
He buys life insurance on Mom and Dad. He names the other brothers and their kids as the beneficiaries (and his kids too so that his wife doesn’t complain). And he makes sure Mom and Dad sit down and explain the planning to his brothers.
When they pass on, each grand child and the other two brothers get one eighth of the insurance proceeds (say $100k each for ease of discussion), expected in a bit over a decade. This will be enough top cover state school education for each of the grandchildren, guaranteeing at least a basic level college education. If they want to go to a higher level school or for graduate work it will be the kid’s responsibility to cover the additional costs, but getting the threshold education covered is a huge help and very important to Mom and Dad.
There is also enough money for the OK child to either supplement their children’s education or their retirement savings, basically making sure that they too will be financially OK for the rest of their life. They won’t be rich, but they will not be completely stressed about money. The insurance makes their life a bit easier.
And the brother that is a mess? His kids will have the chance for their education, something he would have never been able to achieve. There will be an influx of cash to allow him to eventually buy a house if that is the goal, or actually be able to save for retirement. Yes, he could blow it on stupid things like muscle cars and beer, but with some pre-planning by Mom and Dad that too could be avoided and this child protected from themselves (especially if they have a chemical addiction).
And the successful son, what does he get? Peace of mind! He knows his nieces and nephews will get a decent education so that they have a shot at success. He knows his OK brother will continue to be OK, even a little better than that. And his mess of a brother will not be his financial responsibility ever again. Successful brother has basically bought himself independence from the financial and emotional burden of the rest of his family by planning ahead with Mom and Dad.
And Mom and Dad get to spend more money on themselves and their grandchildren while they are still here because of the life insurance planning. They have a guarantee of a legacy for the future, so can go ahead and spend a bit more and spoil their grandchildren like all good grandparents do because now they can do so with a clear conscience. All because of the life insurance.