I recently received an email from a reader that I thought would be perfect for discussion, because my hunch is that there are others who are dealing with or have dealt with a situation like this. I promised that I would try to get some opinions from the CPF audience, so if you have any thoughts or opinions, please share them in the comments.
Here are the important parts from the email I received…
I have a question that I’m wrestling with, which I’m hoping you can help me with. Recently my siblings have been talking to my mother and I about taking a life insurance out for her, in the case that she passes, a sum of money could be left for her kids and grandkids. The idea would be that we would all co-fund this insurance with her and them.
I’m struggling with this on two levels.
- Financially: I’m not sure it is a smart financial decision. My mother is in her early sixties and in relatively good health. The prospect of paying life insurance for the next 25 years or so is not very appealing.
- Morally: I feel like I’m making a bet on her death… a self-serving action. My mother is low income and I would rather put money away in the event that she could not care for her self (healthcare, long term living assistance, etc.).
I emailed you because your website seems to strike the balance between financial and moral wisdom. Please advise me, this topic is likely to come up over the holidays.
My thoughts
You know how sometimes you immediately have a strong opinion about something, and other times you really have to work at it to decide what you think about something? Well, I have been thinking about this for a while and am having a hard time deciding what I think – so I guess I should just start writing and see what comes out…
I think a few important questions to ask are…
What does the mother think about all this? Is she in full support of it because she wants to leave some cash to her heirs, or is she being bullied into it?
If she is fully behind the plan, it could be viewed as similar to her taking the policy out herself, except that she needs the help of the children to pay for it – which is fair, since they will be the ones who will benefit from it anyway.
What I don’t like about it is the “gambling on her death” aspect. If the children are really motivated to take out the policy solely for their own monetary gain, it seems like it could create a little bit of a conflict of interest between wanting your parents to live a long healthy life and wanting to get a fat check.
Is it a wise financial decision?
To me it seems that there is just about an inverse relationship between it being a wise financial decision and it being morally acceptable. If she was in poor health (but was still able to be insured) it would probably be a much better financial decision because your ROI would likely be a lot greater, but I would feel pretty shady if I took a policy out in those circumstances.
On the other hand, if her health is great, and you would have to pay into the policy for 25 years (likely with a very high premium) it seems that it wouldn’t be nearly as good of an investment.
Saving it for her instead
Personally, I like the idea that was mentioned of saving it up for her instead. With her not being very well-off financially it seems that saving up for medical expenses, long-term care, etc. would be a beneficial plan. It would benefit her if she got to a point where expenses got out of hand, but it could also benefit the children by minimizing the possibility that they would have to provide financial assistance. Then, if the money saved was never used, it could be divided back up among the children.
All in all, I think I would prefer to use life insurance to provide for family who can’t adequately cover themselves. Assuming the children are all on their own two feet financially, it would be something I would probably pass on.
{ 11 comments… read them below or add one }
Are all the children grown and able to take care of themselves?
Good take Bob, in theory I agree that setting the money aside for the mom would be the better course, but in practice it gets tangled.
H0w many kids are there? Who would manage it? Would a trust need to be set up? (Now we bring in a lawyer.) Does everyone contribute an equal share? If not, is there a pro-rata share distribution on death? Or on withdrawals by mom (More work for the attorney). Who tracks and maintains the share balances prior to death? What if one sibling wants out and wants “their” money back?
The human factor here is mind boggling.
As far as the insurance, it will be expensive at 62, and what happens if one or more siblings decide to bail in five years when they realize that mom has another 20 years left?
There’s no easy answer here. I think I’d take none of the above. These “kids” need to be primarily concerned with who will take care of mom (and how) and less occupied with how to benefit from her death.
@Kevin,
that is a good point – it definitely could get messy. I guess my thought would be that each sibling would save individually for the possibility of needing to help – but I agree it is far from a perfect solution.
Interesting topic. In my opinion, life insurance should be used to take care of your loved ones in the event of your untimely death. If you are a major breadwinner in the family and you should pass away, your loved ones would have a more difficult time paying their existing expenses without your portion of the income.
The major expenses to consider would include paying off a mortgage, providing college tuition funds for any children, having income to initially readjust to not having that loved one around, and possibly leaving funds to invest for retirement.
So I would question whether or not the mother has any of these expenses. Also, how old are the kids, and what would they do with the money? If they are of working age and able to support themselves to a certain extent, then the need to take out a policy on her life would be lower.
Bob, you make a good point in that if she supports this because she wants to leave some money to heirs, then it would make more sense to take out a policy on her life and take some of the moral aspects of this dilemma out of the equation. However, in this case, would they be considering a whole-life policy, which is more expensive? I’m assuming that in the original reader’s question, they are talking about term insurance, since they mention “making a bet on her death.” With whole-life, it’s not really a bet, since there is a guaranteed death benefit at her death.
In this case, I also agree with you Bob in that since she is in pretty good health, then saving or investing in something else such as long-term care insurance would be a better idea.
Personally, this is pretty cut and dried. Life insurance should cover “final needs,” debt retirement, and income replacement for your dependents. The older you get, the less you SHOULD need.
Children saving to help their parents (or anyone else) is a sound decision. Trying to ensure every sibbling contributes their fair share is not worth fighting over. Do what’s right for you and get on with your life.
The most important inheritance should be great memories .
Sounds like the mom in this situation would be better served by a long-term care insurance policy than a life insurance policy. LTC costs average $6000-$8000/mo nowadays, so a policy to help cover such costs would help the mother as well as the children (unless they don’t mind having her in a facility that takes Medicaid). Or, they could just put the money in a high-yield savings account to cover unforseen medical expenses. Wouldn’t give the same amount of leverage, though. At this mom’s age, life insurance would mainly be used for tax-free wealth transfer or to cover future estate taxes. Given that she was described as “low income”, though, it doesn’t sound like she has a need for either. In which case, having the children contribute to a life insurance policy would be morally suspect, since they’re just leveraging their money to get a higher payout upon their mother’s death.
We all know that each of us WILL die eventually so the question really states, “…WHEN she passes, a sum of money could be left for her kids and grandkids.”….” It sounds like a scheme to quickly increase their own personal wealth.
If the children are in a financial situation where they need the money…they won’t be able to pay for the premiums anyway.
If they are able to afford the premiums, why not put that money into their own savings account for their own future use.
I agree with DARREN about the purpose of life insurance. That is to protect a persons dependents from financial difficulties when they die. It doesn’t sound to me like any of the children in this case are dependent upon their Mother. She would only need enough insurance coverage to cover any costs associated with her death. These costs could be anywhere from $10,000-$30,000 depending on circumstances (or more).
Instead, why not pay for those post-death expenses now. Many funeral homes have pre-paid packages with monthly payments. While it sounds morbid, think of the advantages. It allows the “dying” person to make their own decisions about their post-death care. Whether they want to be cremated or buried, which coffin they want, which burial plot they want, etc. Knowing that their loved one got the exact care they wanted is a wonderful gift to give your grieving family during a very stressful time.
If that is to emotionally difficult to do at the time, such decisions should still be talked about so that the persons wishes are known. Then another helpful route to take is long term care insurance. But that could end up to be a waste of money if the person died before needing the long term care.
Anything other than that is predatory and morally wrong.
I hope that helps.
Assuming that we’re only talking about taking out an insurance policy for the reason of the children getting money when your mother dies, and that if this money wasn’t spent on this insurance policy it would be kept by the children and spent on something for themselves/their own family….
I did some math. I went to Zander Insurance (zanderins.com) and found what it would cost to get a 20 year policy for a 65 year old woman. For 100k worth of coverage it would cost 1535 a year, I assumed there were three of you (just a guess) so I called it 500 per child per year, with each child receiving roughly 33k on your mother’s death.
Then I went to Dave Ramsey’s website and used a financial calculator to see what 500/year invested at 10% would be, and in 20 years it would actually be about 33k. So financially it breaks down to a point where if she lives less than 20 years you make out better with the life insurance, if she lives close to 20 years you about break even that way, but if she lives even a day past the policy you end up with nothing.
So with that being said I wouldn’t do it. First off I never want to be in a position to say “if mom doesn’t die this year I’m out 10k”, that’s creepy. If I’m making an investment I’d like it to be an investment, not a gamble on someone’s life. If you just invest the money you guarantee there will be something there. Also, you made it sound like she’s going to be throwing money into this herself, again if she wants to leave money to the family she would be better off just investing it. I think you should do what others have said and get her long term care insurance, so the money she currently has does not wind up going to pay for her long term care.
I personally think they should go with the policy. I know when I pass I would want my kids taken. And in case I don’t have the assets to do that life insurance is a great substitute.
Just my thoughts
This whole topic makes me shudder. The kids that went to their mother to suggest this should be slapped. Good cotton picking grief. That would be a great holiday meal,” Hey Mom how you feeling today?” “Hope you die in 20 years so we can all sit on our lazy butts and then make money.” I am appalled we are even talking about this. Come ON!
Bob thank you for being responsive to your readers!!!
To all contributors, thank you for your sound advice. God bless you all and keep making good financial decisions based on our Lord’s principles.