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 policy 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.
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.