As Washington unfurls its financial-market rescue, more seniors are looking at having to do private bailouts within their own families.
Even before today's economic crisis, many adult children were benefiting from the generosity of their parents who are approaching retirement or already retired. Almost 4 in 10 adults age 60 or older give money to their adult children according to the Pew Research Center.
Fluctuating costs of fuel and food, declines and volatility in the housing and financial markets, an ever-tightening credit crunch and the relative affluence of the older generation are among the factors driving the trend of retired parents helping to financially support their grown children.
Should You Help?
Every case is different. But not helping an adult child in financial need could have serious repercussions for them and their families including the risk of default, ruined credit, wage garnishment, your grandchildren having to leave college, or the loss of their home
Seniors who Lend Financial Support to Adult Children Must Put Themselves First
Parents often feel like it's their responsibility to help an adult child financially. Before doing so however, you should first protect yourself from financial distress. Many seniors do not realize how much the financial assistance they provide to their children can negatively impact their quality of life.
Helping Your Children Without Tying up Assets or Impacting Your Lifestyle
Withdrawing money from the stock market, your home or other traditional money sources, many of which have negative tax implications, are not the only options you have in order to help a child with a financial need. Instead you may be able to preserve your current wealth by tapping into what most do not realize is a financial asset - life insurance. Both existing life insurance policies and the unutilized capacity in insurable interest in your own life can provide you with needed cash.
Seniors who no longer need life insurance and are planning to allow an existing life insurance policy to lapse can receive 10% to 60% of the face value the policy in cash by selling the policy to a company in an arrangement called a "life settlement." A life settlement is the sale of a life insurance policy insuring the life of a senior citizen in return for a lump sum of cash. Life settlement companies buy insurance policies - term, whole life, universal and other types - from seniors, pay the premiums, and collect the death benefit when the policyholder dies. For example, an elderly couple recently was able to get $147,000 for a $750,000 life insurance policy that had a cash value of only $43,100 via a Life Settlement. They no longer wanted to fund the policy and were able to use the money to help pay for college for their three grandchildren.
How much money a senior will get for his or her policy depends on a number of factors, such as the owner's life expectancy, age, medical condition, type of insurance policy being sold, insurance company rating and annual premium payments. Importantly, most types of life insurance policies can be sold. The most common types of life insurance policies include Universal Life, Whole Life, Term Life and Variable Life. In addition, most types of policies qualify for a life settlement if the owner is 65 years of age or older (however, a terminally or chronically ill person may qualify regardless of age), your life insurance policy is $100,000 or more in face value, and you have had the policy for at least two years.
Smart Financed Life Insurance can free up cash that was previously used to pay for insurance premiums. It entails borrowing premium payments from a third-party lender such as an established bank or from the insurance provider itself. In most cases, the lender is reimbursed for the premiums it paid plus interest upon the death of the borrower by taking a portion of the life insurance value before it is passed on to the beneficiaries. Although the amount owed steadily rises, as long as it is less than the total value of the policy then the beneficiaries still receive a benefit. This is considered preferable to having to liquidate personal assets or investments in order to cover the cost of life insurance premiums or allowing life insurance policies to lapse all together. The added benefit is that by not having to pay for the premiums yourself, you have additional cash to assist your children with while you are still alive.
Changes in the life insurance industry has made premiums less expensive and life insurance companies underwriting friendlier. With the lowering cost of life insurance and changes in your family's life insurance needs, it might make good financial sense to have your life insurance policy reviewed. An Insurance Policy Review may save you money by revealing that you are paying too much for your current life insurance coverage. By lowering your monthly premiums for the coverage you currently have, you will have more money on hand to give to your children.
Don't Just Hand the Money Over
Before making a check to your child it is important to consider the financial implications of doing so. If your child is in a situation to pay you interest on a loan, then it might be wise to help them with a loan, not a gift, with a written repayment agreement. New companies, such as Virgin Money (formerly CircleLending), allow family members as well as friends to lend each other money through a more formal arrangement, which includes automatic monthly payments and deposits. If providing a loan instead of a gift of cash makes you feel guilty think about the following. If your child had taken a loan from a bank then they would have had to have paid thousands of dollars in fees, such as private mortgage insurance and loan origination charges. Also, by not giving your child the money as a gift, your loan to him or her is more of an investment. In addition, a proud child may find it easier to accept aid in the form of a loan instead of as a gift. You can sock the monthly payments your child makes to you away to use for other purposes including perhaps helping other family members.
Stoner Financial specializes in life insurance products that help seniors achieve their immediate and future goals.