You’ve bought life insurance for yourself and for your spouse, but now you’re wondering if there’s another piece of your financial puzzle missing. Do you need to buy an insurance policy for your aging parents?

Maybe your parents have cosigned a loan or credit card with you. Maybe your mother is your main source of childcare, and you’re not sure how you’d make ends meet if she were to die. Or maybe you know that your elderly parents haven’t put aside money for end-of-life costs like funeral expenses.

Whatever the reason, buying life insurance for your parents can seem like an appealing option when you want to feel fully prepared for life’s eventualities. But what does it involve? Read on to find out more.

Can you buy life insurance for your parents?

Yes, but it can be difficult to take out a life insurance policy on someone other than yourself, even if that person is related to you, like a parent.

When you buy life insurance for yourself, you are both the policyholder and the named insured, or the person whose life is being insured by the policy.

In order to take out a policy where the policyholder and the named insured are two different people, you’ll have to prove that you have insurable interest, meaning that you’ll suffer financially if the named insured dies.

This is really hard to prove if you’re an adult child buying a policy for a parent — in fact, it’s almost never approved by insurers. (Another note: you cannot apply for life insurance for another person without that person’s consent.)

You’re much more likely to secure life insurance coverage for your parent if you help them apply for a policy that they will own, where they name you as the beneficiary. (You can still pay the premiums even if your parent owns the policy.)

What type of life insurance should you get for your parents?

If you're purchasing a life insurance policy for your parents, you need to evaluate their needs to determine what type of policy they should get. Term life insurance lasts a set period of time, while whole policies and final expense or guaranteed issue life insurance are permanent and can be costlier.

While not all policies can be taken out on behalf of your parents, it's important to consider the type of policy that is best suited to your needs — and matches why you want to take out a life insurance policy on your parents in the first place.

Term life insurance

Term life insurance only lasts a set period of time, usually between 10 to 30 years. A term life insurance policy covers the basics — it pays out a death benefit to your parents' beneficiaries if they die while the policy is in force, and offers the most affordable rates compared to other types of life insurance policies.

It's the best route if the death of a parent means a substantial loss in income, you'd have to replace their role in the household, or someone else would have to take on their debts. The catch is that your parents will need to apply for this policy themselves.

Whole life insurance

Whole life insurance is a type of permanent life insurance that lasts for the policyholder's entire life, which makes it far costlier than a term life insurance policy. It also comes with a cash-value component that can be used as a forced savings vehicle.

Based on the cost, most people don't need a whole life insurance policy. Your parents can get the same amount of coverage for a lower cost with a term life insurance policy, but they will have to apply for it on their own.

Final expense life insurance

There is one type of life insurance policy that is easier to purchase on behalf of your parents: Final expense insurance.

Also called burial insurance, final expense insurance is a type of permanent life insurance that will last until your parents die, provided you keep paying the premiums.

You’ll still need your parent’s consent to apply for this policy. And while there is no medical exam required, your parent will have to answer some medical questions and the policy won’t be issued if they currently have a terminal illness or condition (see more about that below).

How much does final expense insurance cost?

Final expense insurance monthly premiums can range from $50 to several hundred dollars, depending on age and location. These policies are available for death benefit amounts from $5,000 to $25,000 (though some companies may provide a benefit of up to $50,000). Also of note: if your parent dies within two years of the policy being purchased, most insurers will not pay the benefit — you’ll just get a return of premiums paid.

If you’re really worried about being able to pay for end-of-life expenses for your parents, this type of policy may make sense as a forced savings vehicle. But if you expect your parents to live many more years, it almost always makes more sense financially to invest the money you would have put towards the premiums, and then use that money to fund a burial.

Many people who purchase final expense policies end up paying out more in premiums than the death benefit that is paid out when they die.

Guaranteed issue life insurance

If your parent has a terminal illness or other serious medical condition, they will not qualify for final expense insurance. However, they can purchase a product called guaranteed issue life insurance. The premiums are much higher, but no medical questions are asked. This is truly a last resort insurance product, and is rarely worth it.

See below for a cost comparison of a final expense policy and a guaranteed issue policy for a 70-year-old man:

Methodology: quotes based on policies offered by Policygenius in 2020.

How to get life insurance for your parents

1. Talk to your parents. The first step is to get your parent’s consent to purchase the policy for them. You can’t do it in secret — that would be fraud.

2. Get quotes. Final expense insurance costs are based on age and location. You can get an idea of the policies available and the monthly premiums by using our life insurance quote tool and choosing a policy coverage amount under $50,000.

3. Choose beneficiaries. To keep the death benefit from being taxed, it’s important that between the policyholder, the named insured, and the beneficiary, there are only two names on a life insurance policy. For example, if you are purchasing a final expense insurance policy for your mother and will be the owner of the policy, you need to be named as the beneficiary in order to avoid the death benefit being taxed. If your mother is both the owner of the final expense policy and the named insured, then any beneficiary can be named without the benefit being taxed.

4. Pay premiums. Once your policy is in force, it’s essential that you or your parents continue to pay the premiums. If you stop paying, you will forfeit all previous premiums and will not receive a death benefit.

Tax implications of buying life insurance for your parents

Most of the time, life insurance proceeds aren't taxable and a life insurance policy can help your parents set up a tax-free inheritance to pass on, but there are a few instances when the benefit may be taxed:

• Their estate exceeds $11.4 million
• The benefit payout skips a generation
• It is considered an asset and subject to an inheritance tax
• The payout is considered a "gift" and is subject to a gift tax

While the death benefit won't always be taxed in the above scenarios, it's important to talk to a financial adviser to make sure a policy you set up for your parents will pay out a tax-free sum.

How to talk to your parents about getting life insurance

You can't get a life insurance policy for your parents without their consent, so you may need to speak to them in depth about getting coverage.

When speaking to your parents about getting a life insurance, come with all the facts. You should cover why they need a life insurance policy — who will it benefit and what are the financial ramifications of not getting coverage?

This will require a thorough evaluation of the expenses your parents cover. Do they still provide care for minor children or grandchildren? Even if they don't provide an income, if they provide other services such as childcare, you could still suffer financially and need to pay for those services in the event of their death.

Life insurance is meant to protect loved ones from financial suffering if the policyholder dies. Evaluate and present how the death of your parents may have a negative financial impact, and the type of coverage they'll need to prevent that from happening.

Alternatives to buying life insurance for your parents

If you’re worried about being able to afford burial costs or other final expenses for your parents, you have a few other options:

• Encourage your parents to purchase their own life insurance policy and name you as the beneficiary. If they’re in good health, there are still several options for people over age 60, 70, and even 80.

• Set up a savings account to put aside money for end-of-life expenses for your parents, or encourage them to set one up and pay into it themselves.

• Pre-pay for funeral costs through a funeral home.