A Different Way Parents Can Help With Retirement

Stephen Dunbar has an idea for boosting the retirement income of a client with high income and healthy parents: The client could pay for a survivorship life insurance policy for the parents.

The policy would pay off when both parents have died, or the only living parent has died.

“In most cases, the financial return and leverage from using life insurance to create the asset will be more compelling than trying to save and use the markets,” Dunbar said last week in an email interview.

Dunbar is a managing partner of the Business Strategies Group and a financial professional at Equitable Advisors. He has a law degree from Stanford and holds the Chartered Life Underwriter professional designation.

What It Means

For clients with great relationships with their parents, paying for life insurance for parents could be a simple way to create a big, tax-free nest egg.

The Policies

A survivorship life insurance policy is a policy structured in such a way that it covers two or more people and pays benefits after the death of one or more designated insureds.

Dunbar’s strategy relies on the kinds of survivorship policies called “second to die” policies or “last to die” policies.

The Strategy

Dunbar says the best implementation of the survivorship life strategy for a given client will depend on the nature of the family involved.

“One way to improve economics to the client is for them to ask parents to contribute to the premium in lieu of an inheritance, or as a partial inheritance, so the client gets assistance with paying the premium cost and parents can use annual gifting rules,” he suggested.

A client who was strapped for cash can team up with one or more other siblings to pay the premiums for the life insurance.

The client could be the only policy beneficiary, or the client and two or more siblings could be the beneficiaries.

Typical clients who used the strategy would probably get policy payouts when they were in their mid-60s, Dunbar estimated.

Clients Who Might Benefit

“This strategy could be a good fit for clients who have enough excess cash flow to pay the premiums of the policy even after covering their living expenses and contributions to employer-sponsored retirement accounts,” Dunbar said.

Clients Who Should Pass

“This strategy isn’t a good approach for clients whose parents have health issues,” Dunbar said.

He cited income constraints as another obstacle.

“Depending on how the policy is structured, it could be a challenge for some clients to be able to afford the premium, which can be hundreds of thousands of dollars for the duration of the contract,” he said.

“Another downside of this policy for clients is the uncomfortable nature of discussing this approach with parents,” Dunbar added. “Having this conversation with your parents about their death is a difficult topic for many people to broach. A lot of people have a hard time talking so frankly about death.”

Other Uses for Second-to-Die Life Insurance

Second-to-die life insurance is also used in estate planning for high-net-worth clients, protecting small businesses against the death of an owner and charitable giving.

Stephen Dunbar. Credit: Equitable Advisors