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Using life cover to create a family legacy

Jun 28, 2014

FamilyLeaving an inheritance is one of the main goals identified by retirees when it comes to retirement planning, and while uber-rich families like the Sexwales, Ramaphosas and Zumas have managed to generate enough wealth in this lifetime to keep their families going for generations to come, for many parents just having enough money to be able to retire and not be a financial burden on their children, is the best financial legacy they can hope to leave their offspring.

Yet what parent would not like to leave a family legacy to educate the future generations, help their offspring to buy house or start a business, or create an investment for real wealth creation in the family? Craig Gradidge of Gradidge Mahura Investments says this is a very desirable financial goal among his clients, especially for many black families who are only starting asset accumulation this generation.

One way to kickstart intergenerational wealth creation is through the use of a life policy.

“As a parent myself today I certainly do not want my kids to walk the path that I did. All the hard work and sacrifices that I made were with the aim of creating a better life for my children, and my children’s children. However, for most, building wealth takes time, especially if you are working for an employer. An unexpected death could derail those ambitions and plans in a moment. This is where life cover comes to the fore, and ensures that the dream lives on,” says Gradidge.

Many parents are aware of the need for life insurance to provide an income for their family should they die – but many cancel these policies once the children leave home. By maintaining that life cover one could leave an inheritance for future generations.

If one is taking out life cover with the view to maintaining it into retirement it is very important to ensure you take the correct type of cover so that it remains affordable. If you have an existing policy there is also the option to transfer the premiums to one’s children to continue to pay once you retire –after all, they are the ones who are going to benefit.

Life policy as a retirement fund

The idea of children paying for a parent’s life cover raises another interesting dimension – one that is perhaps more difficult to discuss culturally but certainly something worth considering.

Make your wishes known

If you have life cover or any investments that you specifically want to leave as a family legacy, you need to specify the conditions in your will. You could set up a testamentary trust which is a trust that comes into effect on your death. You would appoint a trustee to direct the trust until a set time when the trust expires – this could be when minor beneficiaries reach a specified age or have completed their studies. If your beneficiaries are adults you could just leave a letter of wishes leaving the money to your offspring.

Many South Africans are finding themselves in the “Sandwich Generation” where they are supporting both their elderly parents and their older children. This generation of 40 and 50 year olds is finding it increasingly difficult to provide for their retirement while meet family obligations such as elderly parents who do not have sufficient retirement savings and children who are studying longer or unable to find work. By taking out life insurance on a parent that you are currently supporting is one way to ensure that you break the cycle of the Sandwich Generation so that your children do not have to support you in retirement.

According to Liberty, R1 million life insurance on a 70-year-old female non-smoker would cost in the region of R1 640. Assuming premium increases of 8.5% per annum, she would have paid around R300 000 in premiums by the time she was 80 years old.

If you have a parent who already has a life policy in place one could simply take over the premium payments, if however one is taking out a new policy it is something that would have to be handled very sensitively – you don’t want your parent to think you want them dead!

Gradidge, who supports his mother, has taken out life insurance for his mother. “The key decision to insure was based on the fact that certain liabilities and expenses would fall on my brothers and myself in the event of her passing. We had a very open and frank discussion before taking out the policy, and she agreed to it and was comfortable with the idea. We also pay for her medical cover so she knows we want her to live as long as possible,” says Gradidge. It may be easier to have this discussion in light of leaving a legacy – through taking out life cover, your parent can ensure the education and financial stability of generations to come.

This article first appeared in City Press

2 Comments

  1. I have to disagree with this article. Viewing life insurance as a form of investment is what got my generation’s (early 40’s) parents in trouble in the first place. Life insurance is part of your risk mitigation strategy, not part of your wealth creation strategy. Mixing the two can have dire consequences. There is a number of issues with this strategy. I will only mention a few;

    1) If you live a long life a proper investment would have returned multiple times what life cover will pay out. If this wasn’t the case life insurers would not be around anymore.

    2) It is a contractual agreement, no premiums no benefits. If you become unable to pay the premiums you lose all your premiums and get no benefit in return.

    3) The impact on cashflow, when kept as an investment, vs an actual investment is huge. Cash outflow for life policy vs cash inflow for investment.

    4) No certainty about premiums. Life insurers can (and do as we have recently seen) increase premiums after the guarantee period.

    5) Many husbands and fathers (especially) have fallen on their own swords (by committing suicide) close to retirement as they see that a life insurance policy payout is the only way out for their family when they haven’t saved enough. This is a failed planning process no matter how you look at it.

    6) Although paying (and especially taking over paying at a late stage) life insurance premiums on your parents life might yield a decent return on investment, is this really ethically a great way to get ahead in life and do you really want to stand at the open grave with “mixed feelings”.

    In practice we see that due to people wanting to keep life cover for their whole life, they choose level premium patterns (I/e sustainable) but end up under insuring their future income potential significantly. They end up being UNDER insured for most of their working life, becoming adequately insured only at a late stage and then going into being massively over insured. Financial planning needs to be both practical/adequate and sustainable. We see most plans fail both these tests…and largely due to a misallocation of capital between risk mitigation and wealth creation. Don’t misunderstand me, I’m not saying people should not have life cover, I’m saying it should not form part of their investment or legacy building strategy.

    Reply
    • Thank you for your contribution. It raises good points. Any financial plan needs to be well thought out especially around the goals you wish to achieve. We also have specific issues in South Africa where many people where actively prohibited from accumulating wealth resulting in many pensioners being supported by their children which is preventing the next generation from creating wealth. We need to think out the box around this and perhaps be less sensitive about using risk cover to “repay” support given in retirement

      Reply

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Maya Fisher-French author of Money Questions Answered

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