Wealth Strategy: Buying Life Insurance On Someone Else

Playing the money game is always interesting because there are so many strategies one can leverage to build a legacy.

Do you remember the classic Friday night board game, Monopoly? The game got more interesting whenever you landed on a Chance or Community Chest square. “What now…am I receiving money or am I paying someone, I can’t look!”

Monopoly is a game to teach individuals how to build wealth. The Community Chest had a card that stated, Life Insurance matures, collect $100. “Yes!” - you say to yourself. However, that card may have given you the impression that life insurance is free money to spend.

Let’s exit the board game trance and enter the physical adult reality. Before life insurance proceeds are paid out, what proceeds this event is often times many years of committed financial contributions or investments into the life insurance policy.

Breaking News: When you pass away you still have expenses that must be settled. These may include loan or credit card balances, mortgages, funeral costs, attorney fees, medical bills, income taxes, etc. One benefit to having life insurance is that it can cover all these last minute expenses.

This is why estate planning is so important. If your parents don’t have a life insurance policy or if you think their coverage will not be enough to cover all the final expenses, you can plan ahead and buy a life insurance policy for them. Your parents would be the insured, and you would be the policy owner and beneficiary. Not only does this ensure their expenses are taken care of, but also ensures any assets they own (ie. home, investment properties, etc.) can be paid off and transferred to you (assuming you’ve been their most fav child and they have you in their will). In addition, this creates generational wealth for the family. If you take out a significant insurance policy and not all the money is used, you can then take the extra proceeds and invest it to create wealth for you and your family. And to make this deal even sweeter - all life insurance proceeds are tax free. Meaning you are not taxed on any proceeds you receive as a beneficiary.

I know what you might be thinking - is this really worth it?! Let’s say in a simple example you take out a $500,000 policy and pay $300 per month and your parents are expected to live another 30 years. $300 x 12 months x 30 years = $108,000. So you invest $108K and receive $500K when your parents pass away. That’s over a 400% rate of return! Who wouldn’t want that??

The idea of insuring your parents is best done earlier rather than later because their age may limit the coverage amount or type of policy available. For instance, term insurance policies typically provide less benefits once you enter your 60’s.

Control and ownership is what you have if you buy a life insurance policy for your parents. You will know if the premiums are being paid because you’re the one paying them. If you have siblings, you can split the cost making it even easier. In addition, you know the amount you will receive is guaranteed when they pass away, so you don’t have to worry about ‘market changes’ like you would with typical investments.

Gambling is a game of chance with very low odds of winning. Re-allocating money to guaranteed returns is always a great idea. Two things guaranteed in life are paying taxes and dying. Life insurance is one of many strategies that enables you to build generational wealth, in a tax efficient manner.