Parents can help out their children by underwriting risks

Sonnie Bailey

12 November 2018

Parents like to help out their children.

More broadly, family members like to help out family members.

It’s kind of a silly thing to say because it’s so obvious. But the fact that’s the case is noteworthy.

I’ve seen this in a number of professional contexts. When I was drafting wills for clients, they almost always wanted to leave money to family members – even if the relationships weren’t especially good, and they had close, life-long friendships that were much more meaningful to them.

When I prepare financial plans for clients, the biggest concern for many people is taking care of their family.

Looking out for our kin seems to be baked into us. It’s as if evolution had a part to play…

Taking care of family members can take many dimensions. Most commonly with people who have the means, it relates to providing educational opportunities. It often also means helping children get onto the property ladder.

But there’s another, more subtle, way that family members help each other out. When I mention it, it often results in an “a ha!” moment with my clients.

Family members can underwrite risks for other family members.

Let’s put it in context of parents and children. (Although it can occur with grandparents and grandchildren, or even between siblings.)

Something I’ve observed is that people who grow up in more affluent families have a greater sense of financial security.

I think part of this comes from growing up in an environment where they knew that if they needed something, or wanted something badly enough (within reasonable limits), they’d be able to get it. Not everyone grows up like that. This sort of experience seems to stick.

But there’s more to it than that. Because most affluent parents stay affluent. Even as adults, their children have a sense of security knowing that their parents can help them out.

When you have this sense of security, you feel more confident about taking certain types of risk. For example, professional risks – whether that’s taking a more speculative role or career path, or starting a venture that you might not have tried.

In most cases, their wealthy parents don’t have to put any money down. The safety net is there, but it doesn’t have to be used.

Underwriting risk explicitly – reducing their need for certain types of insurance

Some parents are even in a position where they can explicitly underwrite risks for their children. Instead of their children taking out personal insurance, they may be able to tell them that they’ll be there if something bad happens. Or at the very least, they might enable their children to take out lower levels of cover than they’ll otherwise need.

For instance:

  • Many people take out trauma insurance (aka critical illness insurance), to help support them if they’re diagnosed with an illness such as cancer, stroke, or a heart attack. The premiums for trauma insurance can be very expensive, and get more expensive as people get older.

If you’re in a sound financial position, you might be able to tell your children that if they’re diagnosed with a defined illness, you’ll help them. Instead of having them pay premiums to an insurer to underwrite this risk, you might be able to save them quite a lot of money.

  • Many people take out income protection insurance in case they’re unable to work for a period of time due to illness. You may be prepared to underwrite this risk by supporting them if this is the case.

At the very least, you might be prepared to underwrite the risk of them being unable to work for a period of, say, 3 months, which would save them money in insurance premiums. The premiums for an income protection policy with a 13-week waiting period are often substantially lower than the premiums for a a policy with a 4-week waiting period.

  • You could give your children a sense of security knowing that you’d look out for your grandchildren financially. This might reduce the need for life insurance for your children.

By making these representations to your children, you could save your children thousands, if not tens of thousands, of dollars in insurance premiums each year. That’s an enormous head start for most people. The most likely scenario is that you’ll never have to pay a cent.

But if you do, you’d probably want to help out anyway.

By providing your children with a financial safety net, it means that your children might be able to aggressively build wealth rather than have money available in the event of an emergency – on the basis that you’ll be there to help.

I’m not saying I’d recommend this in every instance. For one thing, it’s important that you retain enough wealth to help them. A worst-case scenario would be if they end up needing your assistance, and you don’t have the means to help. Or they may try to get insurance at a later stage and no longer be able to get cover because of health issues that have occurred between now and when they would have taken out insurance.

Another factor is that your willingness to assist may depend on the circumstances and your relationship with your children at the time.

It may also create a degree of dependency in your children, which you may not want to foster.

If you need to support one of your children in this way, it may also create relationship issues. For instance, in the absence of effective communication, assisting one child might foster a perception of unequal treatment between siblings.

It’s something that’s worth talking through with your children, and perhaps a professional, to see whether this is suitable for your circumstances.

Consider this article as a starting point: as a different set of examples of how you can help out your children – by underwriting some of the risks and uncertainties to which they’re exposed.

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