Life Insurance are usually bought for protection. You have a set of dependents that you don’t want to leave hanging should something bad happen to you. So you purchase protection that covers a certain amount of their future annual expenses.
This is normal.
But what if you would want to game the system? What if you want to see if you can invest in a high probable lottery?
You purchase life insurance for your parents.
This plan didn’t ran through my mind, but it certainly did for a group of people, this is what I been told by someone. The folks in question really believe in doing this.
The rational is you purchase the insurance for the parents, treat this as a form of “investment” in the hope that you will hit the “jackpot”.
The conflicting thing here is that your parents would one day pass away. That’s the nature of things.
And in many examples nowadays, the spouse or the children get to claim the legacy sum of money from the whole life insurance, or term life insurance policy.
The issue here is a moral one, in that, you are boosting the assured amount in order to profit more greatly from it.
How would you do it?
Its a bit strange for me to even go through this mental exercise, framing in such a way as to profit from it.
To profit from this by the children, it has to be at an age where the children can take care of themselves and likely when they are financially in a better position. This would usually in the 30s.
The parents by this time should be in their 60s.
Would you user term life insurance, which offers no cash value, and only a legacy pay out upon death, or a whole life insurance, which accrues cash value that is added to legacy pay out upon death?
To assure a person over 65 years old, term life insurance would definitely not be cheap, because the actuaries would have determined the likelihood of the assured passing away is high, and thus the premiums would reflect that probability.
For whole life insurance, my thoughts is that unless the policy was started young, the same conditions as the term life applies here. Since there is a cash value portion, the overall premiums may be more expensive.
I tried using DIYInsurance’s Life Protection comparison filter for term life and wasn’t getting anywhere as their term plans are all up to 65 years old.
When it comes to whole life, the latest entry age seem to be 55 years old, an age where it is like the children just became productive. ( could the parents be buying it themselves hoping their jackpot would make their children comfortable!)
The table generated for a limited whole life that you pay for 20 years is as such. Notice the premium for 20 years, come up to the surrender value projected. If it is 55 years old, i wonder if in 5 short years they can accumulate so much cash values. There must be something wrong with the illustrations.
As a value add, i provided a table showing the premium difference, if the assured purchase the plan at 20 years old instead.
In order for the strategy to be lucrative, the assured would have to passed away the earlier the better. In that way, the children pays less premium and the internal rate of return or return on ‘investment’ is higher.
Honestly, I wonder whether this double bet against actuarial science and longevity will work out. Folks younger than 60 years old are having a hard time with pre-existing conditions. Some are struggling to get coverage at 25 years old let alone 60 years old.
Even if you gain entry, the premiums are large.
If you keep quiet about the pre-existing conditions, you got to make sure that come claims time, the medical board don’t determine that the assured have some complications pre-existing that result in the children not able to claim the money.
The biggest factor here is that, to be able to do this, the parents would have to consent. And somehow, if this is happening, I seriously am interested whether why the parents do not have any reservations here.
To me, I wouldn’t even think about doing something like this, except if there is some exceptional circumstances that this HAS to be carried out because its a life and death situation. This for me is somewhat close to accruing some seriously bad karma.