This week, I share with you a question that was recently submitted to me: “Is it true that it pays to insure our parents? If so, I would like to know how it works. »
Don’t choke on your iced tea, please! I am aware that the simple idea of wondering about the possibility of “making money” by thinking about the death of our parents provokes a very unpleasant feeling.
The short answer is: yes, it is possible to insure your parents, or anyone with whom you have an insurable interest. As long as you can provide the expected date of their death, I can tell you if it is profitable or not. You understand, the detailed answer is conditional on many variables.
But first, an important question: should parents be aware?
According to the Civil Code of Quebec, “a person has an insurable interest in his own life and health, and in the life and health of his spouse, of his descendants and of the descendants of his spouse or persons who contribute to its support or education. Since many parents take an active role in the financial well-being of their children even after they have come of age, while at the same time providing much appreciated helping hands with dependent children, demonstrating such interest can be conceivable. If so, this means that in theory you could ultimately insure your parents without their permission, if no medical examination is required, of course — unlike someone with whom the insurance link is not automatically presumed.
Is this the route I suggest you take? I am far from certain, because it seems to me that a complete estate planning in collaboration with your parents would allow, first of all, to determine their own insurance needs and, then, to evaluate if their current protections allow to fill them. Sometimes, parents may hold important, expensive or ill-suited protections for their needs. Holding this type of discussion could lead you to take over part of their current life insurance and reduce the bill, which would allow some families with lower incomes to maintain the protections in force.
In addition, even if the financial stakes do not represent an obstacle for your family, it may very well be that with age, the state of health of your parents makes it more difficult to insure them, with the consequence of the presence of additional premiums. potential if a new proposal is filed with an insurer. Thus, revising the policies already held by them may be an option to consider, especially when term insurance products expire.
Now, does it really “pay”?
It’s up to you to see if you want to get into this sometimes highly emotional discussion with your parents. Do you decide to dive? The big question that follows is that of profitability. You must understand that the latter can only be calculated according to the date of death of the insured person. It will also depend on the premium paid for the insurance. Do you benefit from standard costs? Will an additional premium be added in the event of health problems? Or, does your parents’ situation mean that it is only possible to use simplified or guaranteed issue products, the costs of which are higher?
These are very mathematical considerations, and a few calculations with your financial security advisor will easily allow you to see more clearly in order to validate the projected return by your relative’s attained age. In the event that your parents live to a very old age, the projected return will be, at worst, similar to a guaranteed investment (but at best, from a human perspective).
If this strategy is so rare or misunderstood, is it because it’s too good to be true? Yes, of course, you understood everything. Indeed, it is not enough to estimate the projected profitability. You also have to ask yourself if it is the most appropriate investment tool to achieve your goals. If you are wondering, it is very likely that your parents have reached a certain age. Since insurance premiums are notably based on mortality tables, the older your parents are, the higher the premium will be.
If, for example, the annual premium for $250,000 insurance on the life of your 65-year-old mom is $7,800 a year, isn’t it wiser to ask whether it’s the best use of this capital? The same budget invested in registered investments will be more tax efficient. If used for an RESP, it will fetch generous grants paid out immediately. And if you have a lot of loans whose interest is not deductible, then let’s not even talk about it!
In summary, this is a strategy that is both very safe (your parents will inevitably die one day!) and speculative (but when?). In addition, I invite you to consider it, especially if your disposable income is significant.
I also add this caveat: between theory and practice, there are often many gaps. A financial security advisor will guide you on the elements to consider to determine the insurable interest as well as the roles of owner and payer.