I’ve heard the term “ethical investing” used to describe limiting what companies one puts ones money in to avoid supporting policies and products you don’t believe in. However, I recently read of another investing strategy that made me wonder if it would lead to an ethical dilemma: Is it a good idea to pay for a life insurance policy on one of your parents in order to save money for your own retirement?
Where Did I First Read About Buying Life Insurance on Your Parent?
Frank Wiginton wrote an interesting book called How to Eat an Elephant: Achieving Financial Success One Bite at a Time. In it, he describes (twice) a different way to invest for your retirement.
He says the strategy is aimed at people who have reached their 40s or 50s and who have realized they don’t have much saved for retirement. It is based on the assumption that some time around when they are 65 to 70 and ready to retire, their parents will likely pass away.
(So if you’re younger than that and have already lost your parents, this strategy is a non-starter.)
Anyway, when a parent is in his or her 60s or 70s, the child takes out an insurance policy on the parent with the child named as the beneficiary. There is no cost to the parent: The child pays all of the insurance premiums. When the parent sadly dies, the child will receive the payout as a lump-sum tax-free amount. Unless someone invents a cure for dying in the near term, the child is guaranteed to get this lump sum although the time of receipt will not be known. It’s also a tax-free payout which can make it a desirable way to get a large sum of money.
Aside from the fact your parent has to be living for this to work, your parent also has to be in good health or you will not find an insurance company willing to offer a policy at a reasonable monthly fee. You also have to have a parent who is willing to undergo the medicals and fill out the forms to allow you to insure them.
How Much Benefit Is There to This Type of “Insurance as an Investment” Plan?
An example in the book proposes that you might buy a $500 000 policy when you are 45, pay the premiums for 17 years, and then receive the payout at about 62. The cost would be about $292 400 for the payout of $500 000. In that example, he says the rate of return is about 5.7% a year AFTER tax. That’s the same as a 7.5% rate of return on an investment made in a non-registered account if you are in a 40% tax bracket. (NOTE: These are the numbers from the book and they are approximate. I have not attempted to run any numbers myself.)
The return does not depend on the performance of the stock market during those 17 years.
The insurance policy can be setup to be exempt from any attempt by your creditors to get at it, if necessary. (Although how you’d keep up with the premium payments if you are short of cash is beyond me.)
When Won’t This Insurance Investment Plan Work?
- If your parents and other eligible older relatives are already dead.
- If they are in poor health and cannot be insured for a reasonable fee.
- If you die before your parent does. (It happens.)
- If you need the payout to survive and to keep paying the premiums *before* your parent dies.
Why I Question the Ethics of This Practical Business Case
From a purely numerical point of view, this method of investing by using life insurance is worth considering. I’m not sure if I agree with the math or not, but it’s certainly an option to look into for some investors.
My concern is with the ethics of this scenario.
Imagine insuring your parent with the vague idea that they will die around 85 years of age. Perhaps you will be 58 then. After all, your grandparents had all passed away long before 85. Your parent doesn’t take particularly good care of their health, so it seems reasonable to you at the time you begin the plan.
Now bad things start to happen: to you. You get divorced. You lose your job in a major corporate re-structuring. You cobble together a new career of short-term contracts and part-time retail work. The life insurance premiums for your parent are difficult to pay each month but you don’t have any company pension plan anymore, so you decide this will be where you put your “savings.”
And good things start to happen: in retirement, your parent starts taking better care of himself. He takes up Nordic walking. He stops eating out, due to budget concerns, and develops a new love of homemade highly nutritious organic food. He never smoked and he now moderates his alcohol intake to the level recommended to improve his heart health while protecting his liver. He proudly announces his doctor has said he looks good for 100.
A sense of uneasiness grows.
Still, your parent ages. He weakens and can no longer go for his 5 mile walks. He falls unexpectedly and breaks a hip. He is moved into a long term care home because the joint just won’t mend properly.
And you are his Power of Attorney for Personal Care.
This is where the ethical stuff starts to worry me.
You are a person who will be making the decisions for your parent’s well being in old age. Even if you aren’t the POA for personal care, as a son or daughter you are likely going to be part of the small group of people who will make all the difficult decisions.
You will be working with your parent to choose a nursing home or long term care facility. Obviously, you want to choose the one with the highest standard of care where things like flu outbreaks are very rare and quickly controlled. Right? Where the food and medical care provided is the best. Right?
And when the doctor comes and asks whether you think your parent wants the medical team to take “extraordinary measures” to prolong his life or whether he would want them to “let him go peacefully” you won’t feel any twinges of regret when you say to take all possible measures to keep him going.
Even if he’s paying $5000 a month out of your possible inheritance to keep him in that vegetative state in the home.
Even if you would finally get to stop paying those $1700 a month insurance premiums.
Even if you would get $500 000 in cash if he slipped peacefully away.
Even if your new partner is urging you do “do what’s right; let him go; he can’t tell anyway; think of the money; think of our kids and those university bills…..”
I don’t think anyone should be voluntarily put in to that situation. While I’m sure you would make the correct ethical decision there may another person who might not. And who might burn themselves up with guilt for the rest of their own life wondering if they were, however unwittingly, influenced by the money.
Do I Say No One Should Use This Approach?
No. But I do think it would be worth spending quite a bit of time considering the real emotional and ethical risks that could arise from it.
Do you really want to have to bet on your parent’s timely death to fund your own retirement?
What Does Frank Wiginton Have Against My Dad?
In case you’re thinking Mr. Wiginton is cruel, he is quick to point out that “I do not want you to wish your parents ill; I only want you to look at the various options that may exist to help to generate the retirement savings you need.”
I don’t fault him for suggesting this possible method of raising retirement income. I do think the book, though, should have at least touched on the ethical side of the decision.
Would I Buy a Policy on My Parent?
No. And not just because I expect that at the rate they’re going they’ll survive me by at least 10 years!
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Would you put a policy on your parent’s life? Would it bother you to know one of your brother’s or sister’s was going to benefit greatly financially when your parent died? Please share your views with a comment.
