Adult children may find themselves responsible for making major financial decisions for their aging parents, especially when it comes to life insurance. While many retirees assume they no longer need a life insurance policy after reaching their golden years, there are several reasons why you may feel more confident about your and your parents' finances if they have a life insurance policy in place.
If your parents have let their life insurance lapse or no longer have the funds available to pay for their own policy, you can buy life insurance for your parents. Here's what you need to know about buying life insurance for your parents.
How It Works
To purchase a policy for your parents, you will need to start by determining how much coverage they need. Are you buying a policy that will simply cover the costs of their funeral expenses, or will you need this policy to cover something larger, like a mortgage, unpaid debts or medical expenses? All of this will mean having a serious money conversation with your parents, since you will need to know their current financial situation.
Additionally, while it is possible to purchase a life insurance policy for another individual, you will not be able to do this without your parents' input and consent, as they'll likely need to undergo a medical exam to pass through the insurer's underwriting. This also means that your parents may not qualify for a life insurance policy if they have serious health issues. For that reason, it's best to have conversations with your parents about their life insurance needs earlier rather than later so that they can more easily qualify for a policy.
The cost of a life insurance policy does not change based on who is paying for it. One of the reasons it can be a good idea for you to purchase a life insurance policy for your parents is that you may have an easier time affording the premiums compared to your parents. If they are living on a fixed income or are otherwise struggling financially, you may be in a better position to afford a policy that they thought was out of reach.
Once you and your parents have determined their coverage needs and shopped around to find a policy that best fits those needs, your parents will generally need to sign the insurance application to indicate that they consent to you purchasing it for them. You will also need to demonstrate that you have "insurable interest" in the policy. In other words, the insurance company needs proof that you will be financially impacted by the death of the insured individual. Immediate family members typically have automatic insurable interest.
Finally, you and your parents will need to decide who will be the owner of the life insurance policy. The owner has control of the policy, including the ability to change beneficiaries, transfer ownership, add or delete riders, and change the death benefit amount. While the person paying the premiums is typically the owner of the policy, this may or may not be the best setup for your family's situation. Discussing the topic of life insurance ownership with your parents and siblings can help you figure out who will be the best person for the role.
Types of Policies
There are typically four types of policies you may consider for insuring your parents. These are:
- Term life insurance: This type of insurance offers a payout during a specific time period and is often an affordable way to provide coverage. However, if the insured person outlives the term, there is no death benefit. This kind of policy can be a good fit if the financial concern will no longer be an issue by the time the term is up. For instance, if you simply want to be able to pay off your parents' mortgage if they pass away before it's paid off, a term life insurance policy may be the right option. Term life insurance policies will often not be available past the age of 85, so this option will not work for you if your parents are already in their late 70s or 80s.
- Whole life insurance: This type of insurance is permanent, which means it remains in place for the entire lifetime of the insured individual as long as the premiums are paid. It tends to cost more than term life insurance and may be prohibitively expensive for many families. However, whole life insurance can also offer a number of riders that may be helpful for families, such as accelerated death benefits. With this kind of rider, if an insured parent requires serious and expensive health care prior to their death, you can access a portion of the death benefit to help pay for those services.
- Final expense insurance: This kind of policy, which is also referred to as burial insurance or funeral insurance, is a permanent life insurance with a relatively low death benefit that's intended to cover the costs of burial. Since the face value of this kind of insurance is so low (typically $25,000 or less) its premiums are much lower than those of a typical permanent insurance policy. Also, most insurers do not require a full medical exam for final expense insurance. Generally, the insured individual will only have to fill out a medical questionnaire and provide their prescription history, which means more people may qualify for final expense insurance.
- Guaranteed issue life insurance: If your parents cannot qualify for a general policy because of health issues, try a guaranteed issue policy. This insurance guarantees acceptance, even with a disqualifying condition like a terminal illness or a need for dialysis. The premium costs are much more expensive for guaranteed issue because these policies accept the highest-risk individuals. Generally, you can expect a two-year waiting period with this type of policy. If the insured individual dies before the period is up, many insurers will return the premiums to the policy owner.
How Much Coverage Should You Get?
Buying life insurance for your parents is not like purchasing a policy for yourself. When you are the insured individual, you are more likely to want more from your policy than simply mitigating the highest risks. You may also want to use insurance to help provide a legacy and pay for future expenses.
But buying a policy for your parents necessarily means you are looking at higher insurance costs because of their age and potential health issues. With that in mind, it often makes more sense to purchase insurance that simply meets your family's financial needs, rather than exceeding them.
To figure out the appropriate coverage, consider your parents' finances, their age and health, and their financial dependents. You will need to discuss the issue with your parents and may also need to talk it over with your siblings. Together, you can determine what the financial needs are and what premiums you'll be able to afford.
Making sure your parents have the life insurance they need is a loving gesture and an important part of taking care of them. The best way to start the process is with a conversation. Ask your parents about their life insurance coverage and financial needs so that you can work together to find the best option that will meet all of your needs.