Have you ever heard of the term “Sandwich Generation”?
It has absolutely nothing to do with a loaf of Blue Ribbon bread, a jar of Black Cat extra smooth peanut butter, or a solid brick of Rama margarine.
In fact, the “Sandwich Generation” is a generation of people, typically in their thirties or forties, who are financially responsible for their own children and for the care of their ageing parents.
“Why a sandwich?”, you ask? “It seems like an odd-ball term!”
Well, it’s because these folks really feel like they are sandwiched between the financial care of their own kids and their elderly parents.
Kinda makes more sense now, doesn’t it?
It’s estimated that 30% of working South Africans, in their thirties and forties, are part of this new “Sandwich Generation”.
The reason why we want to bring this up is because we have been getting more and more enquiries on the blog about people wanting to insure their parents’ lives (by that we mean, taking out life cover on their parents’ lives, so that when their parents die, they are the nominated beneficiary on the policy)
We figure most of the requests are coming from the ‘sandwichers’, who are probably looking at their current situation and working out if taking out life cover on their parents is a smart idea.
The first question we need to answer is – can you take out life cover on your parents’ lives?
Yes, you can, because there is an insurable interest.
A person has an insurable interest in the life of another if the loss of that person would cause that financial loss or certain other kinds of losses. In order to exercise an insurable interest, you must take out an insurance policy on the life of that person.
In common law, there is automatically an insurable interest in a parent.
Now that we have established that you can indeed insure your parents’ lives, the next question is “How much is it going to cost?”
The important thing to remember is that every life insurance company has a cut-off age. In most cases that cut-off age is around 65. If your folks are younger than 65, then depending on their health (something we will cover a little later) they might qualify for life cover. If, however they are older than the cut-off age, then obviously the life insurer isn’t going to take on the risk.
Maybe a quick hypothetical scenario is the best way to proceed at this stage. Sometimes, it’s easier to paint a picture with a little story:
Luyiso is part of the Sandwich Generation and supports his mother Thandi who has just celebrated her 60th birthday.
Luyiso is considering taking out life cover on his moms’ life so that he can recover some of the financial contributions he makes every month, the day that she passes away.
The good news is that Thandi is well below the maximum entry age to qualify for life cover (65) and she is in great physical shape.
The life insurer, who Luyiso has approached, is prepared to insure Thandi’s life for R240 000 if Luyiso can meet the monthly premiums of R231 per month.
Luyiso figures that his mom might live until she is 85.
That would mean a financial commitment of 20 years before he will be compensated when she passes away. If he cancels the life insurance policy before then, he will forfeit all the premiums paid.
Would it make financial sense to insure Thandi’s life? The premiums are going to increase by 6% each year, and the life cover amount is going to remain level.
If Thandi does pass away at age 85, it means that Luyiso would have paid over R102 288 in life insurance premiums over the 20 years, but he will receive a guaranteed payout of R240 000.
Could he have got a better return if he invested the money in a bank account?
Not really. Saving R231 per month for the next 20 years, at a 6% increase (the same as the life insurance premium increases) at 7% return per annum, would get Luyiso to R192 353. But remember that in the case of life insurance, the full amount becomes payable if Thandi passes before the age of 85
So, in this scenario, taking out the life cover on his mum’s life is certainly something to consider. It may not pay back every cent Loyiso has paid over to Thandi over the years, but it does represent real financial compensation for the years of financial assistance he provided.
If you are looking at taking out life cover on your parents’ lives, these are the things to consider:
- Are they still young enough to qualify?
- Are they in good health? We mentioned this earlier in the post. Will the insurer apply a health loading (if your parent/s are ill, at the time of application) which could make the premium payments unaffordable?
- What are the annual increases each year? Will you be able to afford the payments in 20-years from now? Remember that if it’s a pure risk life policy then you get nothing out if you cancel it. You are in it for the long-haul, so you need to make sure you’ve done your calculations correctly.
Perhaps start by getting a quote and working out the numbers for yourself.
Until next time.
The Wise About Life Team