Taking out a life insurance policy for yourself or your spouse to protect your children if the worst should happen makes sense. But more and more parents are now taking out policies on their adult children’s lives – but it’s not quite as sinister as it sounds.
One benefit to your children growing up and finally leaving the nest is you can start to cut back on some expenses. A big one is your life insurance policy. Making sure your kids’ future is secure should anything happen to you is essential, but premiums can get expensive.
So, when they no longer need you to look after them, you should have no more need for life insurance. But sadly, more and more older Australians still have life insurance, but on their children’s lives instead.
Why would a parent want insurance on their child’s life?
It does sound a little bit like the beginning of a murder mystery, but the reasons someone might want to take out insurance on an adult child’s life are purely practical.
The short answer is liabilities associated with acting as the bank of mum and dad. In the past, when housing was more affordable, your adult children would have most likely moved out into their own home, with their own mortgage.
But with the astronomical rise in house prices in recent decades, getting your foot in the door of the property market increasingly requires help from parents, be it in the form of lending cash, co-signing on a mortgage or using the parents’ home as collateral for the child’s home.
This of course makes the parents also liable for the loan. In a perfect world, your child would then go on to make all mortgage repayments in full, and on time. But reality is often less than perfect, and if your adult child were to tragically pass away, the mortgage payments would fall on you.
Another factor to consider is whether you will be looking after any grandchildren in the event of your child’s death. These are difficult and heartbreaking things to consider, but the financial implications for parents would be dire.
Lisa Varker, insurance adviser at Compare Club, explains that she’s seeing more and more older people cancelling life insurance policies on themselves and taking them out on their kids. But why would they want to do this?
Next of kin
“Parents can be guarantors for their kid’s mortgage or be listed as next of kin for the grandchildren,” she explains.
“Usually once their kids have moved out they don’t want them back.”
For example, take a client who has just co-signed on a $500,000 mortgage for their child’s first home. They’re concerned that if the child couldn’t work anymore, they would inevitably return home and the parents would have to pay the mortgage.
In this situation you have a few different options for cover.
“Usually, people in this situation look at Life and Total Permanent Disability (TPD) cover – essentially a lump sum for death or in the event the child is unable to work again,” Ms Varker says.
Ms Varker says this scenario will only become more common as the housing crisis tightens and adult children are forced to stay at home longer. Older parents are uniquely at risk.
Going guarantor
“It should [become more common], as mortgages are now harder to get and guarantors are required,” she says.
“Kids may never even leave home and could financially support parents at home, the parents could become disadvantaged if the at-home child can no longer support them.”
If you’re lucky, you may even be able to get your kids to pay for it. But in some cases you may have a hard time convincing them.
“The child may not believe in the benefits of cover, so the parents could insure a child not willing to pay for cover,” Ms Varker says.
We’ll leave that discussion up to you.
Have you helped your kids into the property market? Would insurance on them be worth it for you? Let us know in the comments section below.
Also read: Rules for the bank of mum and dad
