Buying Life Insurance for Your Parents

Most life insurance policies are purchased by the policyholder. To be clear, this means that the person who wants to provide financial assistance to their family after their death. They apply for, receive, and pay for a policy. However, suppose one’s parents are older, uninsured, and perhaps unable to procure their own policy. In that case, their children may become financially responsible for covering the older generations end of life expenses if they were to pass. These expenses may not only include the funeral and burial. Family members may also become liable for their debts and tax obligations.

However, there are available options for those concerned about finding themselves in such a situation. For many, it is possible to purchase a life insurance policy for their parents, so long as you have their consent. Read on to learn the nuances of purchasing a life insurance policy for your parents.

Why Buy Life Insurance for Your Parents?

By some estimates, 36% of the adult population over 58 lacks life insurance in the US. The reasons more than a third of older adults do not have coverage vary. Perhaps they are having trouble paying their monthly bills, are concerned that the medical underwriting process will reveal an underlying health condition, or are technology averse and don’t know how to start.

Unfortunately, the family members of those seniors who lack estate planning are liable to become financially responsible for their loved ones should they die. These expenditures could include burial or funeral services and may encompass the senior’s tax and other debts. With the average burial costing about $8000, family members of uninsured seniors may want to seek a safety net to insulate themselves.

For this demographic of people, it is possible to purchase a policy for their family members, so long as you have their consent. Buying life insurance for your parents is situational and based on your family dynamic. Still, it may be a financial lifesaver if your parents have requested specific funeral and burial wishes.

Purchasing a life insurance policy for your parents can also be helpful to protect your surviving parent if a member of the couple is widowed. In this situation, you will need financial help to care for your surviving parent, and buying life insurance for them can help. If one parent dies and the other is in poor health, it often falls on the children to care for them or to pay for care. Life insurance can help offset these expenses.

What You Need to Buy Life Insurance for Your Parents

Signing your parents up for life insurance should begin with a conversation between you and them about this idea. Consent is required to take out a policy, so it’s a discussion that needs to happen.

Another required element for taking out insurance on another person is proving insurable interest. When it comes to the child/parent relationship, this is almost always a given. Most children will suffer an emotional toll with the loss of a parent and will often be responsible for taking care of their final financial obligations. This situation isn’t always the case, but it’s prevalent.

Finally, your parents will have to qualify for any underwriting pertaining to the policy. For many people, there are medical concerns that may require a physical. The insurance company wants to know more about their health to determine appropriate monthly or annual premium insurance rates.

Talk to Your Parents About What They’d Like To Do

Talking to your parents about their ideas for their future and their funeral is the starting point. You need their consent to take out a life insurance policy, but knowing their wishes can help you plan, begin arrangements, and budget expenses.

Determine the Amount of Coverage for the Policy

Selecting a life insurance amount should begin with funeral and burial expenses. If your parents have a lot of debt, that also needs to be a primary concern. Finally, their wishes for family members or leaving a legacy will play into coverage levels.

When someone is working, one rule of thumb for life insurance is that it should cover ten times their annual income. When someone is retired, their annual income is greatly diminished and may not be enough, but it gives you a starting point.

Use the following formula to determine how much life insurance your parents may need:

(Mortgage) + (Other debts) + (Burial costs) + (Financial needs for beneficiaries) – (Liquid assets) = The amount of Life insurance amount your parent needs.

Ultimately, your goal should be to pay a reasonable amount every month to cover all your loved one’s final expenses. However, you should consider other factors when determining the policy’s overall value.

Because one’s home and property are often their most financially significant asset, you should heavily factor the value of, or remaining balance on, your parent’s home. If your parents are still paying off the property, you will want to ensure you have enough coverage to pay off the remainder of the mortgage. Alternatively, if your parent has paid the house off and you can easily sell it following their death, you may want to subtract that number from the overall policy total.

The same is true of other financial assets your parents may have. Any stocks, bonds, or other financial products and savings should be subtracted from the total coverage amount. If you come up with a positive number, life insurance in that amount or more is needed to cover expenses. If there is a negative number, they have enough assets to cover their final expenses, and life insurance might not be necessary.

Name the Beneficiary

Taking out a life insurance policy requires a beneficiary. The beneficiary is the person who will receive the payout upon the death of the insured. Traditionally, the policy owner is known as “the insured.” The insured then names whomever they want as the beneficiary. When you become the policy owner on life insurance for your parents, they’re the insured, and you own the policy. In this situation, you become both the policyholder and usually the beneficiary.

There is some flexibility with the beneficiary; sometimes, you can add a secondary or contingent beneficiary if the primary is not alive or cannot receive benefits. Sometimes co-primary beneficiaries split the money and responsibilities. It’s also possible to create a trust to serve as the beneficiary.

Determine Who Will Pay for the Coverage

When you take out the policy, you become the policy owner or, as it’s sometimes called, the policyholder, whether that policy is for your parents, you, or someone else. Regardless, you’re the one responsible for paying the premiums.

The named insured on the policy is the person the life insurance focuses on or the insured person. When you take out a policy on someone else, the named insured and the policyholder are different people. If you take out a policy on yourself, you’re both the named insured and the policyholder. In either situation, the policy owner is responsible for payments.

Life Insurance Options for Parents

There are many different types of life insurance. Age and health play heavily into which type of insurance is best suited to your parents, so it’s a good idea to become familiar with the options.

Term Life Insurance

Term life insurance is temporary life insurance that lasts as long as the policy term dictates. However, an age limit is typically associated with a term life policy. This stipulation might make it difficult or impossible for you to get a term life insurance policy for your parents.

Term life is a less expensive insurance option, but it might not work in this situation, depending on how old your parents are and how long you need the insurance. In contrast to other varieties of life insurance, Term policies have a set endpoint. That means there is always the possibility that your parents will outlive the policy. If that happens, the insurance expires, and there is no longer a life insurance policy on your parents.

Whole Life Insurance

Whole life insurance includes a guaranteed death benefit, which lasts until the named insured dies.

Some whole life insurance policies cater specifically to older adults between 50 and 80. These life insurance policies are for smaller amounts and are designed to help pay for funeral expenses and remaining medical bills. They’re often easy to get, with no medical exam, and have set premiums that never change.

Simplified Issue Life Insurance

Simplified issue life insurance can be a great option for older parents or those with health problems that might disqualify them from other life insurance options. This insurance doesn’t require a medical exam, but it may require a medical questionnaire for acceptance. It’s an excellent option for people who cannot get traditional life insurance. The downside is that the amount of coverage is often significantly lower.

Guaranteed Issue Life Insurance

Guaranteed issue or guaranteed acceptance life insurance is specifically designed for people who can’t get other life insurance coverage because of pre-existing conditions or poor health. It’s a relatively inexpensive option, making it even more appealing. The downside is that this type of insurance is typically only for small payouts, around $25,000.

Final Expense Life Insurance

Final expense life insurance is also referred to as burial insurance. This coverage is designed to pay for funeral expenses, burial, and some remaining healthcare expenses or debts. It’s one of the most affordable forms of life insurance and comes with fixed premiums and a guaranteed payout. There also aren’t any health requirements for getting this insurance. The downfall is that it has a low payout, typically between $5000 and $25,000.

Why Sooner Is Better to Buy Life Insurance for Your Parents

Almost every life insurance plan grows in price as you age, simply because your odds of dying are greater as time goes on. For this reason alone, getting life insurance early is better than later.

Before buying life insurance for your parents, it’s critical to understand the appropriate payout amount and weigh and compare your policy options. Once you know what you want to buy and how much, it’s time to act. Life insurance doesn’t go on sale the longer you wait; quite the opposite. In fact, the longer you wait, the more likely your parents will have health issues that could dramatically change their life insurance options.