Question: I will be retiring soon and have a life insurance policy for about R2.6 million. My monthly premium is R2555 with 7% cover growth and 10% premium growth.
I no longer need the cover as I have no debt, or dependents. 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 by children take over the policy. Does it make sense for them to take over the policy
Answer: Before you cancel your life insurance, consider 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 though, your children must be committed towards paying this premium until you pass away. Should they stop payments there will be no capital value for them that they can access.
There are a couple of issues to consider though:
Premium pattern of the existing policy
If the policy has a very 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 that they have sufficient funds to meet these annual increases. Remember, if they stop payment on this policy there will no capital value for them whatsoever.
Time frame
You do not know how long you're going to live for 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 this life insurance policy and live off the proceeds in a very tax efficient way.
I've put together a table below that shows what your children would receive compared with what they contributed had you passed away after 1, 10, 20 and 30 years.
| Year | 1 | 10 | 20 | 30 |
| Sum assured that increases by 7% a year | R2,600,000 | R4,779,994 | R9,402,972 | R18,497,068 |
| Annual premium that increases by 10% a year | R30,660 | R72,295 | R187,514 | R486,362 |
| Sum of premiums paid | R30,660 | R488,641 | R1,756,051 | R5,043,387 |
| Return on premiums paid | 8380% | 45% | 18% | 11% |
If you ceded the policy to your children at retirement and passed away after 10 years, they would have paid in R488 461 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.
I would certainly recommend that they take over the policy.
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.
Kenny Meiring MBA CFP ® is an independent financial adviser who helps people put investment and risk structures in place to live wonderful lives. You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to kenny.meiring@sfpwealth.co.za