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Let your kids take over your life insurance policy

Let your kids take over your life insurance policy
Kenny 2906
Kenny Meiring
By Kenny Meiring
30 Jun 2024
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As a tool for retirement planning, this is a fantastic investment.

Question


I will be retiring soon and have a life insurance policy for about R2.6-million. My monthly premium is R2,555 with 7% cover growth and 10% premium growth. 

I no longer need the cover as I have no debt or dependants. I also have sufficient liquid assets to meet any estate liquidity issues.

I don’t want to cancel the policy without exploring the option of letting my children take over the policy. Does it make sense for them to take it over?

Answer


Before you cancel your life insurance, it makes sense to evaluate the option of having your children take over the policy. How it works is that you cede the policy to your children, and they take responsibility for making payments.

If seen as an investment, this can provide your children with fantastic returns.

Before you do this, however, your children must be committed to paying this premium until you die.

Should they stop payments, there will be no capital value for them. 

There are a few issues to consider.

Premium pattern of existing policy


If the policy has an aggressive age-related premium pattern, the monthly premiums could increase by as much as 16% a year.

If this is the case, your children will need to ensure they have sufficient funds to meet these annual increases. Remember, if they stop payment on this policy there will be no capital value for them whatsoever.

Time frame


You do not know how long you’re going to live so your children should view this investment as a long-term one. I like to put it in the same category as a retirement investment.

As a tool for retirement planning, this is a fantastic investment. You can reinvest the capital from the life insurance policy and live off the proceeds in a tax-efficient way.

I’ve put together a table below that shows what your children would receive compared with what they contributed if you die after one, 10, 20 and 30 years.

life insurance Kenny 2906



If you ceded the policy to your children at retirement and passed away after 10 years, they would have paid R488,641 in premiums and received R4,779,994 as a payout. This equates to a return of 45% a year.

As the premiums are increasing by more than the sum assured, you will find the returns reducing over time.

However, even after 30 years, you will be getting a guaranteed return of 11%, which is excellent.

Tax


The proceeds of the policy will be tax-free. However, there may be estate duty payable if your other assets are large enough. This would be typically 20%.

I would certainly recommend that they take over the policy in your instance.

Insider tip


Many companies have group life schemes that allow you to continue with the life cover when you retire.

It may make sense for you to take up this option and offer it to your children as an investment opportunity. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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