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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 parent?
Perhaps you’ve seen friends receive large benefit payouts when their parents have passed, and you are wondering if you can get the same. Or maybe your parents have cosigned a loan with you, and you’re worried about how you’d manage if their death triggered automatic default. 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, and are wondering how you will mitigate those expenses when they are dead.
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.
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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.)
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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 parent dies, 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 issue (see more about that below).
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 parent, this type of policy may make sense as a forced savings vehicle. But if you expect your parent 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.
If your parent has a terminal illness or other serious medical condition, they will not qualify for final expense insurance. 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:
|Final expense||Guaranteed issue|
Talk to your parent. 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.
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 amount under $50,000.
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.
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.
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.
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