If your retired parents are considering cancelling their life cover policies, do not let them without discussing an alternative option first. We unpack how you can benefit from becoming the premium payer on your parents’ life policies.

When most individuals reach a stage in their lives when all their debt is paid, their children are financially independent, and their retirement savings are sufficient, they generally do not require a life policy any longer. Many then consider cancelling their policies to save the monthly premiums.

However, instead of letting years of life cover premiums that were paid go to waste, you can become the premium payer on the policy. This means that when your parents pass away, you will receive the monetary benefit of the cover amount. Therefore, paying for your parent’s life cover can be viewed as an alternative investment for yourself.

Look at the following example that illustrates how investing in a life cover policy is a great alternative for someone who do not want to waste the years of policy premiums already paid.

Note that for the purpose of simplifying the calculation, we are not considering inflation and we assume that the premium and cover does not increase annually in the example below.

At the age of 42, Mr X takes out a life cover policy of R 2.5 million*:

 

At age 62, Mr X’s son becomes the premium payer on the policy until Mr X passes away at age 82.

 

 

Therefore, by investing only R 188 400 over a 20 year period, Mr X’s son receives a return of R 2.5 million. Let’s compare this to a common investment product:

 

 

If Mr X’s son invested the R 188 400 in a unit trust with a 10% average annual interest rate, the investment would only be worth R 1.27 million after 20 years – almost half the amount of the life cover benefit.

This does not necessarily mean that investing in a life cover policy is better than investing in a unit trust or any other investment product. This example simply indicates how your life cover policy can benefit a family member, as opposed to wasting years of life cover premiums paid.

Remember to always discuss your financial strategy changes with your financial advisor to ensure that any decisions regarding this subject are beneficial in your particular circumstance.