Buying life insurance for your parents

You’ve bought life insurance for yourself and 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 adult 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 parents haven’t put aside money for end-of-life costs, and are wondering how you will mitigate those expenses when they are dead.

Read on to find out:

• Can you buy life insurance for your parents

• How to buy life insurance for your parents

• Alternatives to buying life insurance for your parents

Can you buy life insurance for your parents?

If you’re thinking about owning a policy for someone else, there are four terms you need to know:

Named insured: The person being insured by the policy; in the case of life insurance, the person whose life is being insured.

Policy owner: The person who owns the policy and can make changes to it. This is usually the named insured.

Insurable interest: If the named insured and the policy owner are two different people, then the policy owner has to prove that they have insurable interest in the named insured, meaning they need to prove that they will suffer financially if the named insured dies.

Beneficiary: The person named on the policy who receives the death benefit upon the death of the named insured.

So, to be the policy owner on a policy where your parent is the named insured, you need to prove that you will suffer financially if your parent 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 the insurer. (Another note: you cannot apply for life insurance on a named insured without that person’s consent.)

You’re much more likely to be successful if you help your parent apply for a policy that they will own and then name you as a beneficiary on (you can still pay the premiums).

How to buy life insurance for your parents

There is one type of 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 you pay premiums on until your parent dies.

You’ll still need your parent’s consent to apply for this policy, but there is no medical exam required, though 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 amounts from $5,000 to $25,000 (though some companies may provide a benefit of up to $50,000). Also of note: with most insurers, if your parent dies within two years of the policy being purchased, no benefit will be paid — 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 longer than 3 to 10 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.)

Steps for applying for final expense insurance for a parent

1. 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.

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 amount under $50,000.

3. Choose beneficiaries. To keep the death benefit from being taxed, it’s important that between the policy owner, the named insured, and the beneficiary, there be just 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 benefit being taxed. If your mother is 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 pay the premiums. If you stop paying, you will forfeit all previous premiums and will not receive a death benefit.

Alternatives to buying life insurance for your parents

If you’re worried about being able to pay for end-of-life expenses for your parents, you still have a few options:

1. Encourage your parents to purchase their own life insurance policy and name you as the beneficiary. If they’re in good health relatively young, a term policy could be an affordable option. Find out more about the best life insurance for seniors.

2. 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.

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