If you’re a member of the “sandwich generation,” your story is typical of many people in your demographic. You find yourselves taking care of both your own family (one or more kids off to university) and your aging parents as well. This can cause a major financial drain on funds you had hoped to set aside for retirement savings. So it’s important to take steps to plan for this contingency now. Luckily, there’s an insurance-based strategy that could help.
Making regular deposits to your investment portfolio, whether through an RRSP or TFSA, is a great start. By adding funds to your investments on a regular basis, you are “dollar-cost averaging,” meaning you are regularly buying through different cycles in the markets, buying more when markets are down and less when markets are up. In this way, your overall average cost is lower.
But that may still leave you with less than you’d ideally like at retirement, particularly if current expenses are high. So another strategy you might want to consider is to “insure” your parents. Yes, I know this sounds a bit offbeat, but it can bring considerable peace of mind, especially if your parents have debts or other obligations to be settled out of their estate.
If your parents are in their 60s and in good health, talk to your financial advisor about taking out an insurance policy on their lives. For about $250 a month, you can purchase a $250,000 term life policy. When your parent passes away, the $250,000 is paid out to you and is tax exempt. This payout could come just as you yourself are getting ready to retire.
In this way, a term life insurance policy can become a very important “investment,” even though term life policies (in contrast to whole life or universal life policies) typically do not have an investment component as such. The premiums you pay now as you also increasingly support your parents will be returned to you in the form a lump-sum tax-free payment of the full insured amount on the death of your parent.
There are many benefits to term insurance, but you must keep in mind that this type of insurance covers a specific “term” as specified in the insurance contract, say 10 years, after which it may be renewable, typically at a higher premium. It does not last for the insured’s lifetime, as “permanent” insurance does.
Term life insurance is the most basic of insurance policies. It ensures that a specified sum of money will be paid out to beneficiaries (in this case you) if your parent dies during the term of the policy. This money can then be used to immediately add to your own retirement savings, or pay off your mortgage, or whatever other payments or investments you’ve deferred while looking after your kids and parents.
The terms can range from 5 to 30 years, and the premium will remain the same for the term you have specified. If no claim is made during the term of the policy, in most cases, the policy will expire worthless.
Providing your parent or parents qualify (at their age, a medical questionnaire or examination are sometimes necessary), term insurance will provide the coverage you need to help “insure” your own retirement.
Remember, though, that a term insurance policy is not liquid, and you must be mindful of this. And it’s important to consult a qualified insurance agent to see whether this strategy is right for you and your parents.
Courtesy Fundata Canada Inc. © 2015. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice.
