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Is America Getting Too Creative With Life Insurance?

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A Strange Voicemail

I got a call from my mom the other day, which I missed, and she left a lengthy voicemail.

Anyone who has ever gotten a lengthy voicemail from a parent, out of the blue, in the middle of the work day probably has sweaty palms when dialing their inbox to listen; either you're in deep trouble, or someone else is. I wasn't excluded from the palm hyperactivity when I dialed in to listen.

It more or less went like this:
"Hey <insert pet name here>," she said, "I am in the middle of a meeting and I was hoping you'd answer. All of us in the meeting got to talking about some retirement planning, and one gentleman was telling us how he told his son to avoid paying into his 401(k). He instructed his son to buy a life insurance policy on him instead, and I thought this was really strange. Obviously I thought of you since you're in the industry. Anyway, call me back when you get this. Love you."

Not at all what I was expecting!

In the world of life insurance, we see and hear a lot of things. Some are funny, some are crude, some are just quirky. But I hadn't yet categorized this one. In fact, I hadn't yet decided if I thought it was a good or bad idea.

Before I called my mom back, I thought about it a bit, and lined the pros and cons out in my mind. It's definitely not the first time I've heard of a child-parent buying situation. Those are common.

But avoiding the 401(k) or other traditional retirement plan to buy life insurance on a parent? This was new territory for me.

The Cons

Starting with the most obvious con of them all, a person would have to lose their parent to get their money. While the idea might have sounded good and noble from the father's standpoint, I can't imagine the son waiting around for his dad to pass so he could get his "retirement" check.

Speaking of waiting, what if the father had an exceptionally long life? How is the son going to plan his retirement if the years keep ticking and he's still just paying premiums?

Even worse, what if the son died first? His own family or heirs wouldn't have anything to show for it unless they decided to pick up his father's premiums from there on out!

And what if the child bought a term life insurance policy to try to get more bang for his buck and his father simply outlived the duration of the contract? The son could effectively then lose his dad and his paid premiums from previous decades.

What if the son missed a few payments? A lapsed policy does nothing but a dis-service to the family and the insurance company takes the bacon.

This whole plan seemed like a pretty basic No-No.

The Pros

Despite this sounding like an absurd movie plot, I decided to try to find some good in all this.

Considering life insurance is a great leverage tool, the son could pay premiums for a duration of years, and then he'd be entitled to a large sum of cash somewhere down the road. His multiplier would begin extraordinarily high (which would decrease the longer the his father lived) and he would yield a sizable amount.

The son could also have a predictable amount of cash to expect in the future because the death benefit amount would never decrease or go away as long as he maintained his premiums.

He would also get the entire lump sum of cash tax free, so he wouldn't have to worry about squandering anything over to Uncle Sam.

Picking It Apart

I'm a big analytic (okay, huge) so once I played out all the scenarios in my head, I was still undecided whether this dad had good intentions or if he had lost a few marbles along his journey in life so far.

This was my resolution:

2014 is not 1984.

Simply put, things are different. People are looking for something new. People want something altogether and fundamentally different than what they've always been doing.

For all we know, this father has taken a serious beating in his own 401(k) and he's literally betting his life against his own son making the same calamity of a mistake. Maybe he's a good father and he doesn't want his son to have to ride the waves of the market, stress about it his entire life, and be forced to retire with whatever happens to be in the account at career's end.

Perhaps he just wants a simplified and predictable result for his sons future.

But are Americans getting overly creative? Is this idea just a scheme? Are there too many variables which outweigh the numerical side of things?

Growing wealth, no matter how it's accomplished, is never black and white. There really aren't guarantees of completely predictable results. Today's good methods might be yesterday's bone headed moves, or vise versa.

Anyone who's ever started a business and either succeeded or failed, is proof.

Anyone who's ever gambled and won or lost, is proof.

There is no one method, just methods which work and don't work.

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